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 March 31, 19992000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission Registrant, State of Incorporation, IRS Employer
File Number Address, and Telephone Number Identification No.
1-10568 LG&E Energy Corp. 61-1174555
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32030
Louisville, Ky. 40232
(502) 627-2000
2-26720 Louisville Gas and Electric Company 61-0264150
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32010
Louisville, Ky. 40232
(502) 627-2000
1-3464 Kentucky Utilities Company 61-0247570
(A Kentucky and Virginia Corporation)
One Quality Street
Lexington, Kentucky 40507-1428
(606) 255-2100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
LG&E Energy Corp.
129,677,030 shares, without par value, as of April 30, 1999.28, 2000.
Louisville Gas and Electric Company
21,294,223 shares, without par value, as of April 30, 1999,28, 2000,
all held by LG&E Energy Corp.
Kentucky Utilities Company
37,817,878 shares, without par value, as of April 30, 1999,28, 2000,
all held by LG&E Energy Corp.
This combined Form 10-Q is separately filed by LG&E Energy Corp.,
Louisville Gas and Electric Company and Kentucky Utilities Company.
Information contained herein related to any individual registrant is filed
by such registrant on its own behalf. Each registrant makes no
representation as to information relating to the other registrants. In
particular, information contained herein related to LG&E Energy Corp. or
any of its direct or indirect subsidiaries other than Louisville Gas and
Electric Company or Kentucky Utilities Company is provided solely by LG&E
Energy Corp., not Louisville Gas and Electric Company or Kentucky Utilities
Company, and shall be deemed not included in the Form 10-Q of Louisville
Gas and Electric Company or the Form 10-Q of Kentucky Utilities Company.
TABLE OF CONTENTS
PART I
Item 1 Financial Statements
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income 1
Consolidated Balance Sheets 3
Consolidated Statements of Cash Flows 5
Consolidated Statements of Retained Earnings 7
Consolidated Statements of Comprehensive Income 8
Louisville Gas and Electric Company
Statements of Income 9
Balance Sheets 10
Statements of Cash Flows 12
Statements of Retained Earnings 1314
Statements of Comprehensive Income 1415
Kentucky Utilities Company
Statements of Income 1516
Balance Sheets 1617
Statements of Cash Flows 1819
Statements of Retained Earnings 1920
Notes to Financial Statements 2021
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 2726
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 3632
PART II
Item 1 Legal Proceedings 3733
Item 6 Exhibits and Reports on Form 8-K 3834
Signatures 3935
Part I. Financial Information - Item 1. Financial Statements
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited - Thousands of $ Except Per Share Data)
Three Months
Ended
Mar. 31,
2000 1999 1998
REVENUES:
Electric utility $365,890 $361,673 $323,795
Gas utility 88,316 75,779 92,759
International and non-utility 128,511 34,170171,184 161,813
Total revenues 565,963 450,724625,390 599,265
OPERATING EXPENSES:
Operation and maintenance:
Fuel and power purchased 203,196 205,088 115,765
Gas supply expenses 66,619 79,714119,228 95,064
Utility operation and
maintenance 103,858 103,705 102,983
International and non-utility
operation and maintenance 41,254 13,32148,538 44,964
Depreciation and amortization 52,538 50,07258,373 54,736
Non-recurring charges (Note 3) 20,713 -
Total operating expenses 469,204 361,855553,906 503,557
Equity in earnings of uncon-
solidated ventures (Note 4)5,930 21,656 5,981
OPERATING INCOME 118,415 94,85077,414 117,364
Other income and (deductions) 6,453 2,7035,009 6,388
Interest charges and preferred dividends 34,965 30,520 26,057
Minority interest 1,494 1,571 1,343
Income before income taxes 92,777 70,15345,964 91,661
Income taxes 35,210 23,47916,082 34,882
Income from continuing
operations 57,567 46,674
Loss from discontinued29,882 56,779
Income on disposal of dis-
continued operations, net of
income tax benefitexpense of $1,985$328 (Note 3)4) - (3,506)
Income before cumulative
effect of change in
accounting principle788
NET INCOME $ 57,56729,882 $ 43,16857,567
- 1 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income (cont.)
(Unaudited - Thousands of $ Except Per Share Data)
Three Months
Ended
Mar. 31,
2000 1999 1998
Income before cumulative
effect of change in
accounting principle $ 57,567 $ 43,168
Cumulative effect of change
in accounting for start-up
costs, net of income tax
benefit of $5,061 - (7,162)
NET INCOME $ 57,567 $ 36,006
Average common shares
outstanding 129,677 129,683129,677
Earnings (loss) per share -
basic and diluted:
Continuing operations $ .44 $ .36
Discontinued operations .00 (.02)
Cumulative effect of
accounting change .00 (.06)
Total $ .44 $ .28diluted $.23 $.44
The accompanying notes are an integral part of these financial statements.
- 2 -
LG&E Energy Corp. and Subsidiaries
Consolidated Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
Mar. 31, Dec. 31,
2000 1999 1998
CURRENT ASSETS:
Cash and temporary cash investments $ 128,548109,195 $ 108,72391,413
Marketable securities 18,253 20,8629,991 10,126
Accounts receivable - less reserve 270,105 285,794270,362 318,914
Materials and supplies - primarily at average cost:
Fuel (predominantly coal) 85,072 78,85578,967 91,931
Gas stored underground 11,895 34,14423,289 49,038
Other 74,553 72,457
Net assets of discontinued opera-
tions (Note 3) 146,613 143,65196,296 90,259
Prepayments and other 35,390 37,78454,515 54,038
Total current assets 770,429 782,270642,615 705,719
UTILITY PLANT:
At original cost 5,615,225 5,581,6675,958,178 5,916,905
Less: reserve for depreciation 2,396,575 2,352,3062,550,527 2,503,851
Net utility plant 3,218,650 3,229,3613,407,651 3,413,054
OTHER PROPERTY AND INVESTMENTS - LESS RESERVES:
Investment in unconsolidated
ventures (Notes 2 and 4) 225,695 167,877(Note 5) 242,949 249,455
Non-utility property and plant, net 298,768 285,899475,137 477,442
Other 139,260 117,32125,265 25,596
Total other property and investments 663,723 571,097743,351 752,493
DEFERRED DEBITS AND OTHER ASSETS 196,487 190,540275,757 262,491
Total assets $4,849,289 $4,773,268$5,069,374 $5,133,757
The accompanying notes are an integral part of these financial statements.
- 3 -
LG&E Energy Corp. and Subsidiaries
Consolidated Balance Sheets (cont.)
(Thousands of $)
CAPITAL AND LIABILITIES
(Unaudited)
Mar. 31, Dec. 31,
2000 1999 1998
CURRENT LIABILITIES:
Current portion of long-term debt $ 411,808 $ 411,810
Notes payable $ 434,746 $ 365,135443,520 449,578
Accounts payable 183,304 237,820202,197 220,460
Net liabilities of discontinued opera-
tions (Note 4) 152,384 158,222
Other 291,055 243,699254,844 248,841
Total current liabilities 909,105 846,6541,464,753 1,488,911
Long-term debt 1,510,816 1,510,7751,279,426 1,299,415
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 522,535 520,721584,460 585,880
Investment tax credit, in
process of amortization 91,877 93,84483,838 85,828
Regulatory liability 107,223 109,411102,234 104,795
Other 206,963 206,280178,598 182,357
Total deferred credits and other liabilities 928,598 930,256949,130 958,860
Minority interests 106,236 107,815111,133 109,952
Cumulative preferred stock 135,140 135,328 136,530
COMMON EQUITY:
Common stock, without par value -
129,677,030 shares outstanding 778,273 778,273777,013 777,013
Other (3,037) (3,314)(2,165) (1,956)
Retained earnings 483,970 466,279354,944 366,234
Total common equity 1,259,206 1,241,2381,129,792 1,141,291
Total liabilities and capital $4,849,289 $4,773,268$5,069,374 $5,133,757
The accompanying notes are an integral part of these financial statements.
- 4 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 57,56729,882 $ 36,00657,567
Items not requiring cash currently:
Depreciation and amortization 52,538 50,07258,373 54,736
Deferred income taxes - net 2,185 2,942
Loss(8,091) 4,694
Income from discontinued operations -
net of tax (Note 3)4) - 3,506
Cumulative effect of change
in accounting principle -
net of tax - 7,162(788)
Other (15,372) (3,885)(638) (17,627)
Change in net current assets 21,736 65,70859,434 19,647
Other (11,172) (19,156)(15,718) (8,417)
Net cash flows from operating activities 107,482 142,355123,242 109,812
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (242) (223) (3,584)
Proceeds from sales of securities 132 3,075 961
Construction expenditures (79,002) (36,615)(53,716) (79,410)
Investments in unconsolidated
ventures (Note 2)- (74,250) (886)
Proceeds from sale of investment
in affiliate (Note 4)5) 17,907 33,821 16,000
Net cash flows from investing activities (116,579) (24,124)(35,919) (116,987)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of medium-term notes - 150,000
Retirement of bonds (20,022) - (21)
Short-term borrowings 2,170,510 416,174 1,222,843
Repayment of short-term borrowings (2,178,857) (346,174)(1,410,824)
Redemption of preferred stock - (1,202) -
Payment of common dividends (41,172) (39,876) (36,810)
Net cash flows from financing activities (69,541) 28,922 (74,812)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS 19,825 43,41917,782 21,747
BEGINNING CASH AND TEMPORARY
CASH INVESTMENTS 108,723 111,00391,413 105,604
ENDING CASH AND TEMPORARY
CASH INVESTMENTS $ 128,548109,195 $ 154,422127,351
- 5 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
2000 1999 1998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 2,9694,410 $ 2,6602,969
Interest on borrowed money 30,097 23,533 22,549
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these financial statements.
- 6 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Retained Earnings
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
2000 1999 1998
Balance at beginning
of period $366,234 $466,279 $722,584
Net income 29,882 57,567 36,006
Cash dividends declared on
common stock ($.30750.3175 and
$.28386$.3075 per share) 41,172 39,876 36,810
Balance at end of period $354,944 $483,970 $721,780
The accompanying notes are an integral part of these financial statements.
- 7 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
2000 1999 1998
Net income $29,882 $57,567 $36,006
Unrealized holding gains (losses)
on available-for-sale securities
arising during the period (312) 192 (14)
Reclassification adjustment for realized
gains and losses on available-for-sale
securities included in net income 14 5 111
Other comprehensive (loss) income,
before tax (298) 197 97
Income tax expensebenefit (expense) related to items
of other comprehensive (loss) income 113 (64) (37)
Comprehensive income $29,697 $57,700 $36,066
The accompanying notes are an integral part of these financial statements.
- 8 -
Louisville Gas and Electric Company
Statements of Income
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
2000 1999 1998
REVENUES:
Electric $152,721 $140,585$161,326 $150,840
Gas 88,316 75,779 92,759
Rate refund (Note 10) (1,881) -
Total operating revenues 249,642 226,619 233,344
OPERATING EXPENSES:
Fuel for electric generation 39,926 32,457 36,041
Power purchased 21,753 23,026 9,600
Gas supply expenses 63,394 50,492
64,076Non-recurring charges (Note 3) 8,141 -
Other operation expenses 36,975 40,192
40,368
Maintenance 13,881 14,702 10,266
Depreciation and amortization 24,149 24,144 23,294
Federal and state
income taxes 9,668 9,556 12,417
Property and other taxes 5,163 5,036 4,956
Total operating expenses 223,050 199,605 201,018
NET OPERATING INCOME 26,592 27,014 32,326
Other income and (deductions) 1,519 1,080 311
Interest charges 10,690 9,178 9,238
NET INCOME 17,421 18,916 23,399
Preferred stock dividends 1,165 1,089 1,123
NET INCOME AVAILABLE
FOR COMMON STOCK $ 17,82716,256 $ 22,27617,827
The accompanying notes are an integral part of these financial statements.
- 9 -
Louisville Gas and Electric Company
Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
Mar. 31, Dec. 31,
2000 1999 1998
UTILITY PLANT:
At original cost $2,913,378 $2,896,139$3,086,048 $3,065,839
Less: reserve for depreciation 1,168,270 1,144,1231,238,536 1,215,032
Net utility plant 1,745,108 1,752,0161,847,512 1,850,807
OTHER PROPERTY AND INVESTMENTS -
less reserve 1,347 1,1541,353 1,224
CURRENT ASSETS:
Cash and temporary cash investments 38,859 31,73049,059 54,761
Marketable securities 15,093 17,8516,902 6,936
Accounts receivable - less reserve 151,972 142,580172,077 113,859
Materials and supplies - at average cost:
Fuel (predominantly coal) 21,596 23,99317,472 17,350
Gas stored underground 11,215 33,48515,754 38,780
Other 34,097 33,10335,192 35,010
Prepayments 2,438 2,2852,100 2,775
Total current assets 275,270 285,027298,556 269,471
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,841 5,9195,529 5,607
Regulatory assets 36,467 37,64330,386 31,443
Other 17,988 22,87810,010 12,900
Total deferred debits and other assets 60,296 66,44045,925 49,950
Total assets $2,082,021 $2,104,637$2,193,346 $2,171,452
The accompanying notes are an integral part of these financial statements.
- 10 -
Louisville Gas and Electric Company
Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
Mar. 31, Dec. 31,
2000 1999 1998
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Retained earnings 243,289 247,462258,987 259,231
Other (736) (786)(1,120) (1,025)
Total common equity 667,723 671,846683,037 683,376
Cumulative preferred stock 95,32895,140 95,328
Long-term debt 626,800 626,800360,600 380,600
Total capitalization 1,389,851 1,393,9741,138,777 1,159,304
CURRENT LIABILITIES:
Current portion of long-term debt 246,200 246,200
Notes payable 131,791 120,097
Accounts payable 114,208 133,673143,357 113,008
Provision for rate refunds 13,401 13,2615,409 8,962
Dividends declared 23,090 23,16817,665 24,236
Accrued taxes 27,020 31,92937,814 23,759
Accrued interest 7,615 8,0387,566 9,265
Other 18,436 15,24216,795 15,725
Total current liabilities 203,770 225,311606,597 561,252
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 259,117 254,589257,422 255,910
Investment tax credit, in
process of amortization 70,470 71,54266,182 67,253
Accumulated provision for pensions
and related benefits 60,177 59,52940,741 38,431
Customer advances for construction 10,208 11,104
Regulatory liability 62,685 63,52955,923 58,726
Other 35,951 36,16317,496 19,472
Total deferred credits and other liabilities 488,400 485,352447,972 450,896
Total capital and liabilities $2,082,021 $2,104,637$2,193,346 $2,171,452
The accompanying notes are an integral part of these financial statements.
- 11 -
Louisville Gas and Electric Company
Statements of Cash Flows
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,91617,421 $ 23,39918,916
Items not requiring cash currently:
Depreciation and amortization 24,149 24,143 23,294
Deferred income taxes - net (3,498) 3,650 2,547
Investment tax credit - net (1,071) (1,072)
(1,078)
Other 1,677 1,772 1,000
Changes in net current assets:
Accounts receivable (9,392) 22,202
Materialsassets and supplies 23,673 22,185
Provision for rate refunds 140 (1,706)
Accounts payable (19,465) (26,547)
Accrued taxes (4,909) 9,180
Accrued interest (423) 114
Prepayments and other 3,041 2,111liabilities 5,399 (7,335)
Other 4,156 4,704 4,710
Net cash flows from operating activities 48,233 44,778 81,411
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (124) (223) (3,096)
Proceeds from sales of securities - 3,065 444
Construction expenditures (21,269) (17,323) (19,064)
Net cash flows from investing activities (21,393) (14,481) (21,716)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings 11,694 -
Retirement of first mortgage bonds (20,000) -
Payment of dividends (24,236) (23,168) (21,152)
Net cash flows from financing activities (32,542) (23,168) (21,152)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (5,702) 7,129 38,543
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 54,761 31,730 50,472
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 49,059 $ 38,859
$ 89,015- 12 -
Louisville Gas and Electric Company
Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
2000 1999
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 11,2883,184 $ 4,27611,288
Interest on borrowed money 8,743 8,811 8,705
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these financial statements.
- 1213 -
Louisville Gas and Electric Company
Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
2000 1999 1998
Balance at beginning
of period $259,231 $247,462 $258,910
Net income 17,421 18,916
23,399
Subtotal 276,652 266,378 282,309
Cash dividends declared on stock:
5% cumulative preferred 269 269
Auction rate cumulative
preferred 529 453 487
$5.875 cumulative preferred 367 367
Common 16,500 22,000
19,800
Subtotal 17,665 23,089 20,923
Balance at end of period $258,987 $243,289 $261,386
The accompanying notes are an integral part of these financial statements.
- 1314 -
Louisville Gas and Electric Company
Statements of Comprehensive Income
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
2000 1999 1998
Net income available for common stock $16,256 $17,827 $22,276
Unrealized holding gains (losses) on
available-for-sale securities arising
during the period (159) 84 (27)
Reclassification adjustment for realized
gains on available-for-sale securities
included in net income - 66
Other comprehensive (loss) income,
before tax (159) 84 39
Income tax expensebenefit (expense) related to items
of other comprehensive (loss) income 64 (34) (16)
Comprehensive income $16,161 $17,877 $22,299
The accompanying notes are an integral part of these financial statements.
- 14 -
Kentucky Utilities Company
Statements of Income
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
1999 1998
OPERATING REVENUES $217,349 $183,219
OPERATING EXPENSES:
Fuel for electric generation 58,155 48,347
Power purchased 39,317 17,989
Other operation expenses 27,142 29,973
Maintenance 12,520 13,333
Depreciation and amortization 21,991 21,486
Federal and state
income taxes 17,144 14,968
Property and other taxes 4,113 4,088
Total operating expenses 180,382 150,184
NET OPERATING INCOME 36,967 33,035
Other income and (deductions) 2,168 1,714
Interest charges 9,507 9,700
NET INCOME 29,628 25,049
Preferred stock dividends 564 564
NET INCOME AVAILABLE
FOR COMMON STOCK $ 29,064 $ 24,485
The accompanying notes are an integral part of these financial statements.
- 15 -
Kentucky Utilities Company
Balance SheetsStatements of Income
(Unaudited)
(Thousands of $)
ASSETS
(Unaudited)Three Months
Ended
Mar. 31,
Dec. 31,2000 1999
1998
UTILITY PLANT:
At original cost $2,701,846 $2,685,528
Less: reserveOPERATING REVENUES $217,778 $217,349
OPERATING EXPENSES:
Fuel for depreciation 1,228,305 1,208,183
Net utility plant 1,473,541 1,477,345
OTHER PROPERTY AND INVESTMENTSelectric generation 55,615 58,155
Power purchased 38,845 39,317
Non-recurring charges (Note 3) 11,030 -
less reserve 14,408 14,238
CURRENT ASSETS:
CashOther operation expenses 28,848 27,142
Maintenance 14,150 12,520
Depreciation and temporary cash investments 56,838 59,071
Accounts receivable - less reserve 104,163 106,003
Materialsamortization 24,331 21,991
Federal and supplies - at average cost:
Fuel (predominantly coal) 21,993 23,927
Other 26,050 24,877
Prepayments 3,783 2,427
Total current assets 212,827 216,305
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,127 5,227
Regulatory assets 26,972 28,228
Other 25,356 19,859
Total deferred debitsstate
income taxes 11,366 17,144
Property and other assets 57,455 53,314taxes 4,840 4,113
Total assets $1,758,231 $1,761,202operating expenses 189,025 180,382
NET OPERATING INCOME 28,753 36,967
Other income and (deductions) 1,325 2,168
Interest charges 9,904 9,507
NET INCOME 20,174 29,628
Preferred stock dividends 564 564
NET INCOME AVAILABLE
FOR COMMON STOCK $ 19,610 $ 29,064
The accompanying notes are an integral part of these financial statements.
- 16 -
Kentucky Utilities Company
Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
Mar. 31, Dec. 31,
2000 1999
UTILITY PLANT:
At original cost $2,872,130 $2,851,066
Less: reserve for depreciation 1,311,991 1,288,819
Net utility plant 1,560,139 1,562,247
OTHER PROPERTY AND INVESTMENTS -
less reserve 14,575 14,349
CURRENT ASSETS:
Cash and temporary cash investments 1,190 6,793
Accounts receivable - less reserve 93,211 88,549
Materials and supplies - at average cost:
Fuel (predominantly coal) 23,154 30,225
Other 27,496 26,213
Prepayments 2,322 3,743
Total current assets 147,373 155,523
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4,727 4,827
Regulatory assets 21,738 23,033
Other 28,401 25,111
Total deferred debits and other assets 54,866 52,971
Total assets $1,776,953 $1,785,090
The accompanying notes are an integral part of these financial statements.
- 17 -
Kentucky Utilities Company
Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
Mar. 31, Dec. 31,
2000 1999 1998
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Retained earnings 310,231 299,168324,080 329,470
Other (595) (595)
Total common equity 617,776 606,713631,625 637,015
Cumulative preferred stock 40,000 40,000
Long-term debt 546,330 546,330430,830 430,830
Total capitalization 1,204,106 1,193,0431,102,455 1,107,845
CURRENT LIABILITIES:
Current portion of long-term debt 115,500 115,500
Accounts payable 56,497 100,01286,176 116,546
Provision for rate refunds 21,500 21,50013,907 20,567
Dividends declared 18,188 18,18825,188 19,150
Accrued taxes 39,523 16,73338,082 10,502
Accrued interest 10,559 8,1109,825 7,329
Other 35,319 31,22619,208 18,617
Total current liabilities 181,586 195,769307,886 308,211
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 243,443 244,493240,678 243,620
Investment tax credit, in
process of amortization 21,407 22,30217,656 18,575
Accumulated provision for pensions
and related benefits 52,736 50,04448,269 48,285
Regulatory liability 44,537 45,88244,539 46,069
Other 10,416 9,66915,470 12,485
Total deferred credits and other liabilities 372,539 372,390366,612 369,034
Total capital and liabilities $1,758,231 $1,761,202$1,776,953 $1,785,090
The accompanying notes are an integral part of these financial statements.
- 1718 -
Kentucky Utilities Company
Statements of Cash Flows
(Unaudited - Thousands of $)
Three Months
Ended
Mar. 31,
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,62820,174 $ 25,04929,628
Items not requiring cash currently:
Depreciation and amortization 24,331 21,991 21,486
Deferred income taxes - net (4,602) (2,396) 847
Investment tax credit - net (919) (895)
(968)Other (911) 1,556
Changes in net current assets:
Accounts receivable 1,840 4,600
Materialsassets and supplies 1,934 4,907
Provision for rate refunds (1,173) (456)
Accounts payable (43,515) (5,269)
Accrued taxes 22,790 18,475
Accrued interest 2,449 (87)
Prepayments and other (1,356) 1,803liabilities 2,222 (17,031)
Other 3,215 2,169(2,804) 1,718
Net cash flows from operating activities 34,512 72,55637,491 34,571
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from insurance reimbursement 59 8
Construction expenditures (23,530) (18,240) (15,299)
Net cash flows from investing activities (18,181) (15,291)(23,530) (18,240)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings - 381,500
Repayments of short-term borrowings - (415,100)
Retirement of debt - (21)
Payment of dividends (19,564) (18,564) (17,582)
Net cash flows from financing activities (19,564) (18,564) (51,203)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (5,603) (2,233) 6,062
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 6,793 59,071 5,453
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 56,8381,190 $ 11,51556,838
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid (received) during the period for:
Income taxes $ -(9,260) $ 138(904)
Interest on borrowed money 6,560 6,079 6,476
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these financial statements.
- 1819 -
Kentucky Utilities Company
Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
2000 1999 1998
Balance at beginning
of period $329,470 $299,167 $304,750
Net income 20,174 29,628
25,049
Subtotal 349,644 328,795 329,799
Cash dividends declared on stock:
4.75% preferred 237 237
6.53% preferred 327 327
Common 25,000 18,000
17,018
Subtotal 25,564 18,564 17,582
Balance at end of period $324,080 $310,231 $312,217
The accompanying notes are an integral part of these financial statements.
- 1920 -
LG&E Energy Corp. and Subsidiaries
Louisville Gas and Electric Company
Kentucky Utilities Company
Notes to Financial Statements
(Unaudited)
1. Effective May 4, 1998, following the receipt of all required state and
federal regulatory approvals, LG&E Energy Corp. (LG&E Energy or the
Company) and KU Energy Corporation (KU Energy) merged, with LG&E Energy
as the surviving corporation (the Merger). The accompanying unaudited
consolidated financial statements reflect the accounting for the merger
as a pooling of interests and are presented as if the companies were
combined as of the earliest period presented. However, the financial
information is not necessarily indicative of the results of operations,
financial position or cash flows that would have occurred had the
merger been consummated for the periods for which it is given effect,
nor is it necessarily indicative of future results of operations,
financial position, or cash flows. The financial statements reflect
the conversion of each outstanding share of KU Energy common stock into
1.67 shares of LG&E Energy common stock. The outstanding preferred
stock of Louisville Gas and Electric Company (LG&E), a subsidiary of
LG&E Energy, and Kentucky Utilities Company (KU), a subsidiary of KU
Energy, were not affected by the Merger.
KU Capital Corporation, a subsidiary of KU Energy, was merged into LG&E
Capital Corp. (Capital Corp.) on July 24, 1998, with the latter as the
surviving corporation. The consolidated financial statements include the accounts of
LG&E Energy LG&E, Capital Corp., and KU and their
respectiveits wholly-owned subsidiaries collectively referred to herein
as(LG&E Energy or the
"Company." All significant intercompany items and transactions
have been eliminated from the unaudited consolidated financial
statements.Company). In the opinion of management, all adjustments, including
those of a normal recurring nature, have been made to present fairly
the consolidated financial position, results of operations and cash
flows for the periods indicated. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading.
See the Company's, LG&E'sLouisville Gas and KU'sElectric Company's (LG&E's) and
Kentucky Utilities Company 's (KU's) Reports on Form 10-K for 19981999 for
information relevant to the accompanying financial statements,
including information as to the significant accounting policies of the
Company.
2. On March 30, 1999,February 28, 2000, the Company announced that its Board of Directors
accepted an offer to be acquired an indirect 19.6% ownership
interest in Gas Natural BAN, S.A. (BAN),by PowerGen for cash of approximately
$3.2 billion or $24.85 per share and the assumption of $2.2 billion of
the Company's debt. Pursuant to the acquisition agreement, among other
things, LG&E Energy will become a natural gas distribution
company that serves 1.1 millionwholly owned subsidiary of PowerGen
and its U.S. headquarters. The Utility Operations of the Company will
continue their separate identities and serve customers in the northern portionKentucky and
Virginia under their present names. The preferred stock and debt
securities of the provinceUtility Operations will not be affected by this
transaction. The acquisition is expected to close 9 to 12 months from
the announcement, shortly after all of Buenos Aires, Argentina.the conditions to consummation
of the acquisition are met. Those conditions include, without
limitation, the approval of the holders of a majority of the
outstanding shares of common stock of each of LG&E Energy and PowerGen,
the receipt of all necessary governmental approvals and the making of
all necessary governmental filings, including approvals of various
regulators in Kentucky and Virginia under state utility laws, the
approval of the FERC under the FPA, the approval of the SEC under the
PUHCA of 1935, and the filing of requisite notifications with the
Federal Trade Commission and the Department of Justice under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
expiration of all applicable waiting periods thereunder. Shareholder
meetings to vote upon the approval of the acquisition are scheduled to
be held in early June 2000 for both LG&E Energy and PowerGen. During
the first quarter of 2000, the Company expensed approximately $1.0
million relating to the PowerGen transaction. The purchase price totaled
$74.3 million, including transaction costs,foregoing
description of the acquisition does not purport to be complete and is
qualified in its entirety by reference to LG&E Energy's current reports
on Form 8-K, filed February 29, 2000, with the SEC.
As of the end of April 2000 the Company has filed applications for
approval with the U.S. Securities and Exchange Commission (under the
Public Utility Holding Company Act of 1935), the Kentucky Public
Service Commission, the Virginia State Corporation Commission and the
Federal Energy Regulatory Commission (under the Federal Power Act).
Hearings before the Kentucky Commission were held April 19-21 and
submission of briefs and data requests have been completed. A decision
is expected on or about May 15 and the Company will have approximately
23 days from any order in which has been reflectedto file for rehearing, or approximately
33 days in investments in unconsolidated ventures inwhich to file for appeal. While the accompanying balance
sheet. The Company accountedand PowerGen
believe that they will receive the requisite regulatory approvals for
the acquisition usingmerger in sufficient time to complete the purchase
method, and will record its share of earnings usingtransaction on the
equity method.
The purchase price exceeded the underlying equity in BAN by $13.0
million. The Company allocated this differenceschedule men
- 21 -
tioned above, there can be no assurance as to the assetstiming of such approvals
or the ability to obtain such approvals on satisfactory terms or
otherwise.
3. During the first quarter 2000, the Company took a $12.1 million ($.09)
after-tax charge for the continued integration of the operations of
LG&E and liabilities acquired based onKU including their estimated fair values.
3.customer service centers and their retail
electric and gas operations. The result of this consolidation was the
elimination of approximately 400 positions most of which were taken by
employees through the Company's voluntary enhanced severance program.
4. Effective June 30, 1998, the Company discontinued its merchant energy
trading and sales business. This business consisted primarily of a
portfolio of energy marketing contracts entered into in 1996 and early
1997, nationwide deal origination and some level of speculative trading
activities, which were not directly supported by the Company's physical
assets. The Company's decision to discontinue these operations was
primarily based on the impact that volatility and rising prices in the
power mar
- 20 -
ketmarket had on its portfolio of energy marketing contracts.
Exiting the merchant energy trading and sales business enablesenabled the
Company to focus on optimizing the value of physical assets it owns or
controls, and to
reducereduced the earnings impact on continuing operations of
extreme market volatility in its portfolio of energy marketing
contracts. The Company is in the process of settlingcontinues to settle commitments that obligate
it to buy and sell natural gas and electric power. It also plans to sell its natural
gas gathering and processing business. If the Company is
unable to dispose of these commitments or assets it will continue to
meet its obligations under the terms of the contracts. The Company,
however, has maintained sufficient market knowledge, risk management
skills, technical systems and experienced personnel to maximize the
value of power sales from physical assets it owns or controls,
including LG&E, KU and those of
the Big Rivers Electric Corporation (Big Rivers).WKE.
As a result of the Company's decision to discontinue its merchant
energy trading and sales activity, and the initial decision to sell the
associated gas gathering and processing business, the Company recorded
an after-tax loss on disposal of discontinued operations of $225
million in the second quarter of 1998. The loss on disposal of
discontinued operations resultsresulted primarily from several fixed-price
energy marketing contracts entered into in 1996 and early 1997,
including the Company's long-term contract with Oglethorpe Power
Corporation (OPC).OPC. Other components
of the write-off includeincluded costs relating to certain peaking options,
goodwill associated with the Company's 1995 purchase of merchant energy
trading and sales operations and exit costs, including labor and related benefits, severance and
retention payments,costs.
In the fourth quarter of 1999, the Company received an adverse decision
from the arbitration panel considering its contract dispute with OPC,
which was commenced by the Company in April 1998. As a result of this
adverse decision, higher than anticipated commodity prices, increased
load demands, and other generalfactors, the Company increased its after-tax
accrued loss on disposal of discontinued operations by $175 million.
The additional write-off included costs related to the remaining
commitments in its portfolio and administrative expenses.exit costs expected to be incurred to
serve those commitments. Although the Company used what it believes to
be appropriate estimates for future energy prices, among other factors,
to calculate the net realizable value of discontinued operations, it also recognizes that
there
are inherent limitations in models to accurately predict future
events. As a result, there is no guarantee that higher-than-
anticipated future commodity prices, or load demands lower-than-
estimated assetand other events that could impact the
amounts recorded by the Company.
- 22 -
Operating results for the discontinued merchant energy trading and
sales prices orbusiness follow.
Three Months
Ended
Mar. 31,
2000 1999
Revenues $ 74,698 $ 146,498
Loss before taxes (1,389) (4,650)
Loss from discontinued opera-
tions, net of income taxes (1,389) (2,749)
Net liabilities of discontinued operations at March 31, 2000, follow.
Accounts receivable $ 24,809
Price risk management assets 30,816
Accounts payable and accruals (36,215)
Other assets and liabilities, net (3,388)
Net assets before accrued
loss on disposal of dis-
continued operations 16,022
Accrued loss on disposal
of discontinued operations,
net of income tax benefit
of $102,647 (168,406)
Net liabilities of discon-
tinued operations $(152,384)
Total pretax charges against the accrued loss on disposal of
discontinued operations through March 31, 2000, include $260.6 million
for commitments prior to disposal, $69.6 million for transaction
settlements, $11.1 million for goodwill, and $31.5 million for other
factors could not result in
additional losses. Theexit costs. While the Company has been successful in settling portions
of its discontinued operations, but significant assets, operations and
obligations remain. The Company continues to manage the remaining
portfolio and believes it has hedged certain of its future obligations
through various power purchase commitments and planned construction of
physical assets. Management cannot predict the ultimate effectiveness
of these hedges.
The pretax net fair value of the remaining commitments as of March 31,
2000, are currently estimated to be approximately $41.3 million in
2000, $33.0 million to $57.8 million each year in 2001 through 2004 and
$9.7 million in the aggregate thereafter.
As of March 31, 1999,2000, the Company's discontinued operations were under
various contracts to buy and sell power and gas with net notional
amounts of 16.3 million Mwh's of power and 21.9 million Mmbtu's of
natural gas with a volumetric weighted-average period of approximately
38 and 41 months, respectively. These notional amounts are based on
estimated loads since various commitments do not include specified firm
volumes. The Company is also under contract to buy or sell coal and
SO2 allowances in support of its power contracts. Notional amounts
reflect the nominal volume of transactions included in the Company's
price risk management commitments, but do not reflect actual amounts of
cash, financial instruments, or quantities of the underlying commodity
which may ultimately be exchanged between the parties.
- 23 -
As of May 9, 2000, the Company estimates that a $1 change in
electricity prices and a 10 cents10-cent change in natural gas prices across
all geographic areas and time periods could change the value of the
Company's remaining energy portfolio by approximately $7.5$2.6 million. In
addition to price risk, the value of the Company's remaining energy
portfolio is subject to operational and event risks including, among
others, increases in load demand, regulatory changes, and forced
outages at units providing supply for the Company. As of March 31, 1999,May 9, 2000,
the Company estimates that a 1% change in the forecasted load demand
could change the value of the Company's remaining energy portfolio by
$8.3$11.7 million.
- 21 -
Operating results for discontinued operations follow. The Company
charged its loss from discontinued operations for the three months
ended March 31, 1999, to accrued loss on disposal of discontinued
operations.
Three Months
Ended
Mar. 31,
1999 1998
Revenues $166,739 $940,699
Income (loss) before taxes (6,054) (5,491)
Income (loss) from dis-
continued operations,
net of income taxes (3,709) (3,506)
Net assets of discontinued operations at March 31, 1999, follow.
Cash and temporary cash
investments $ 4,317
Accounts receivable 56,637
Price risk management assets 86,611
Non-utility property and
plant, net 161,839
Accounts payable (58,032)
Price risk management
liabilities (27,733)
Goodwill and other assets
and liabilities, net 38,567
Net assets before accrued
loss on disposal of dis-
continued operations 262,206
Accrued loss on disposal
of discontinued operations,
net of income tax benefit
of $66,009 (115,593)
Net assets of discon-
tinued operations $146,613
Total charges against the accrued loss on disposal of discontinued
operations through March 31, 1999, include $85.3 million for
commitments prior to disposal, $51.2 million for transaction
settlements, $11.1 million for goodwill, and $20.8 million for other
exit costs. The reserve as of March 31, 1999, represents management's
best estimate of the loss from remaining discontinued operations until
disposal and the costs of disposing of these operations.
As of March 31, 1999, the Company's discontinued operations were under
various contracts to buy and sell power and gas with net notional
amounts of 28.1 million MWh's of power and 22.0 million MMBTU's of
natural gas with a volumetric weighted-average period of approximately
42 and 60 months, respectively. These notional amounts are based on
estimated loads since various commitments do not include specified firm
volumes. The Company is also under contract to buy or sell immaterial
amounts of coal and SO2 allowances in support of its power contracts.
Notional amounts reflect the nominal volume of transactions included in
the Company's price risk management commitments, but do not reflect
actual amounts of cash, financial instruments, or quan
- 22 -
tities of the underlying commodity which may ultimately be exchanged
between the parties.
The fair values of discontinued operations' price risk management
assets and liabilities as of March 31, 1999, and the averages for the
three months then ended follow (in thousands of $):
Average
Fair Value Fair Value
Liabil- Liabil-
Commodity Assets ities Assets ities
Electricity $ 86,611 $ 27,256 $ 92,367 $ 28,367
Natural gas - - 3,389 -
Totals 86,611 27,256 $ 95,756 $ 28,367
Reserves - 477
Net values $ 86,611 $ 27,733
The table above does not include the fair value of various transactions
not previously recorded using mark to market accounting since these
transactions commit the Company to the sale or purchase of electricity
or natural gas without specified firm volumes.
The fair values above are based on quotes from exchanges and over-the-
counter markets, price volatility factors, the use of established
pricing models and the time value of money. They also reflect
management estimates of counterparty credit risk, location
differentials and the potential impact of liquidating the Company's
position in an orderly manner over a reasonable period of time under
present market conditions. The change in values from December 31,
1998, to March 31, 1999, resulted from volatility and risk management
actions taken in connection with discontinuing the merchant energy
trading and sales business.
If the Company is unable to dispose of its remaining commitments, it
will continue to meet its obligations through the terms of the
contracts. The net fair value of these commitments as of March 31,
1999, are currently estimated to be approximately $63.3 million in
1999, $28.8 million to $37.4 million each year in 2000 through 2004,
and $4.7 million for later years.
The Company's discontinued operations maintain policies intended to
minimize credit risk and revalue credit exposures daily to monitor
compliance with those policies. As of March 31, 1999,2000, over 78%95% of the
Company's price risk management commitments were with counterparties
rated BBB equivalent or better. As of March 31, 1999, seven2000, six
counterparties represented 91%88% of the Company's price risk management
commitments.
4. On5. In March 15,2000, the Company sold its interest in CEC-APL L.P., a
partnership in which the Company owned a 49% interest, for
approximately $18 million. The sale resulted in a pretax gain of
approximately $2 million. In March 1999, LG&E-Westmoreland Rensselaer,
a California general partnership in which the Company owns a 50%
interest, sold substantially all the assets and major contracts of its
79 MW gas-fired cogeneration facility in Rensselaer, New York, with net
proceeds to the Company of approximately $34 million.
The sale resulted in6. In February, 2000, the Commission acknowledged that the PBR Order
issued on January 7, 2000, contained an after-
tax gain toerror and issued an Order
changing the Company of approximately $8.9 million.
5. The Company adopted Emerging Issues Task Force Issue No. 98-10,
Accounting for Energy Trading and Risk Management Activities (EITF No.
98-10) in the first quarter of 1999. The task force concluded that
energy trading contracts should be recorded using mark to market
valuation on the balance sheet, with the gains and losses shown net in
the income statement. EITF No. 98-10 more broadly defines energy
trading to include cer
- 23 -
tain financial activities related to physical assets which were not
previously marked to market by established industry practice. The
effects of adopting EITF No. 98-10 did not have a material impact on
the Company's consolidated results of operations or financial position.
6. On April 5, 1999, LG&E and KU filed a joint agreement among the
companies and the Kentucky Attorney General to amend the companies'
previously-filed performance-based ratemaking (PBR) plan. The
amendment requested Kentucky Public Service Commission (the Commission)
approval of a five-yearannual base rate reduction plan, which would reduce
electric rates by $20from $36.5 million in the first year (beginning July 1,
1999), and by $8 million annually for each of the next four years
(through June 30, 2004), for a total five-year savings to customers of
$52$33.9
million. The reductions will be distributed between LG&ECommission also ordered rehearing on several issues and
KU
customers based on the same methodology the Commission approvedsubsequently held hearings in its
previous merger order for allocating the merger savings to the
utilities' customers (53 percent to KU customers; 47 percent to LG&E
customers). The joint agreement includes adoption of the PBR plan as
proposed by the companies.
The amended filing also includes the establishment of a $6 million
program over the five-year period to assist low-income customers in
paying their energy bills.
In addition to the rate reductions and energy assistance program, the
amended filing calls for LG&E and KU to extend for an additional year
(through June 30, 2004) both the rate cap and the merger-savings
surcredit the utilities established as part of their earlier merger
plan. Under the rate cap, the companies agreed, in the absence of
extraordinary circumstances, not to adjust base electric rates for five
years following the merger. They also agreed to a monthly surcredit to
customers' bills reflecting the 50 percent share of the non-fuel merger
savings allocated to the utilities' customers in the first five years
following the merger.
As part of the amended PBR filing, LG&E also agreed to refrain from
filing for an increase in natural gas rates over the five-year period
(through June 30, 2004).
On April 13, 1999, the Commission issued initial orders implementing
the amended PBR plan, effective July 2, 1999, and subject to
modification. The Commission has adopted a procedural schedule, which
provides for discovery, hearings and public comment. The Commission
has also consolidated into the continuing PBR proceedings an earlier
March 8, 1999, rate complaint by a group of industrial intervenors, in
which the intervenors have requested significant reductions in the
electric rates of LG&E and KU.2000. The Commission is expected
to issue a final ruling during 1999.
7. On May 7, 1999, Capital Corp. issued $150.0 millionFinal Order on Rehearing by June 2000. The outcome of medium-term
notes due May 2004, withthese
hearings are not anticipated to have a stated interest ratematerial effect on the
notesconsolidated financial results of 6.205%.
After takingthe Company.
In March 2000, the 2000 Kentucky General Assembly passed House Bill 897
that established requirements for cost allocations, affiliate
transactions and a code of conduct governing the relationship between
utilities and their non-utility operations and affiliates. Management
does not expect this matter to have a material adverse effect on the
Company's financial position or results of operations.
In March 2000, LG&E filed a Notice and Statement with the Kentucky
Public Service Commission requesting an adjustment in LG&E's gas rates.
LG&E asked for a general adjustment in gas rates for a test year for
the twelve months ended December 31, 1999. The revenue increase
applied for is $27.9 million. The new rates are expected to go into
account the forward-starting interest-rate swap
entered into on April 9, 1999,effect October 1, 2000. The increase is to hedge the entire issuance, the
effective rate will be 6.13%. The proceeds were usedrecover higher costs for
providing service to repay a
portion of Capital Corp.'s outstanding commercial paper, which had been
used to fund the BAN acquisition and other working capital needs.natural gas customers.
- 24 -
8.7. External and intersegment revenues and income from continuing
operations by business segment for the three months ended March 31,
2000, follow:
Income
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $155,119 $ 6,207 $ 16,305
LG&E gas 88,316 - (49)
KU electric 210,771 7,007 19,610
Power Operations 4,676 - 6,827
Western Kentucky
Energy 60,754 - (501)
Argentine Gas
Distribution 30,742 - (731)
Other Non-Utility
Operations 75,012 - (9,990)
All Other - (13,214) (1,589)
Consolidated $625,390 $ - $ 29,882
External and intersegment revenues and income from continuing
operations by business segment for the three months ended March 31,
1999, follow:
Income
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $148,326 $ 2,514 $ 17,613
LG&E gas 75,779 - 214
KU electric 213,347 4,002 29,064
Independent Power Operations 6,904 - 14,180
Western Kentucky
Energy 59,978 - (1,024)
Argentine Gas
Distribution 29,797 - 357
Other Capital Corp. 31,832Non-Utility
Operations 65,134 - 1,676888
All Other - (6,516) (4,513)
Consolidated $565,963$599,265 $ - $ 57,567
External and intersegment revenues and income from continuing
operations by business segment for the three months ended March 31,
1998, follow:
Income
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $140,585 $ - $ 21,421
LG&E gas 92,759 - 855
KU electric 183,210 24 24,485
Independent Power
Operations 5,227 - 3,984
Argentine Gas
Distribution 27,411 - 196
Other Capital Corp. 1,532 - (715)
All Other - (24) (3,552)
Consolidated $450,724 $ - $ 46,674
The assets of the Company's Argentine Gas Distribution segment
increased from $346.3 million at December 31, 1998, to $418.4 million
at March 31, 1999, due mainly to acquiring a 19.6% ownership interest
in BAN. See Note 2 of Notes to Financial Statements.
9. On March 15, 1999, Capital Corp. entered into a letter of intent to
lease or acquire three combustion turbines and is currently negotiating
the terms of a definitive agreement. The aggregate price, including
construction of related facilities, is estimated to be approximately
$175 million. Capital Corp. is considering various financing
alternatives.
10.LG&E and KU employ a fuel adjustment clause (FAC) mechanism, which
under Kentucky law allows the companies to recover from customers, the
actual fuel costs associated with retail electric sales. In February
1999, LG&E received orders from the Kentucky Commission requiring a
refund to retail electric customers of approximately $3.9 million
- 25 -
resulting from reviews of the FAC from November 1994 through April
1998. The orders changed the Company's method of computing fuel costs
associated with electric line losses on off-system sales appropriate
for recovery through the FAC.
The Kentucky Commission has not issued LG&E an order for the review
period May 1998 through October 1998, nor have they issued orders
pertaining to KU's FAC for review periods after November 1994.
However, following the methods set forth in the LG&E orders the Company
estimates up to an additional $4.8 million could be refundable to LG&E
and KU retail electric customers for open review periods through
December 1998.
On March 11, 1999, the Commission denied LG&E's Petition for Rehearing
for the period November 1994 through October 1996 and directed LG&E to
reduce future fuel expense by $1.9 million in the first billing month
after the Order. LG&E recorded a provision for the rate refund of
$1,881,000 in March and refunded the amount through the fuel adjustment
clause in April 1999. In a separate series of Orders on March 11,
1999, the PSC granted LG&E's Petition for Rehearing for the period
November 1996 through April 1998 and established a procedural schedule
for LG&E and other parties to submit evidence and for a hearing before
the Commission. In the same Orders the PSC granted the Petition for
Rehearing of the KIUC to determine if interest should be paid on any
fuel refunds for this latter period.
11.Reference56,779
8. Reference is made to Part II, Legal Proceedings, below and Part I, Item
3, Legal Proceedings, of the Company's, KU Energy's, LG&E's and KU's
(and Note 18 of the Company's Notes to Financial Statements) Annual
Reports on Form 10-K for the year ended December 31, 1998.1999.
- 2625 -
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Recent Developments
On April 13, 1999, the Kentucky Public Service Commission (PSC) issued
initial orders in the performance-based ratemaking proceedings for LG&E and
KU. The PSC orders implement, effective July 2, 1999, the companies'
pending performance-based ratemaking proposals, including a five-year, $52
million rate reduction plan jointly filed by LG&E, KU and the Kentucky
Attorney General's Office with the PSC on April 5, 1999. See Note 6 to the
Notes to Financial Statements of the Company, LG&E and KU contained in Item
1 of this Form 10-Q for further discussion of this matter.
On March 30, 1999, the Company acquired a 19.6% ownership interest in Gas
Natural BAN, S.A. (BAN), a natural gas distribution company that serves 1.1
million customers in the northern portion of the province of Buenos Aires,
Argentina. See Note 2 of Notes to Financial Statements under Item 1 for
more information.
On March 15, 1999, Capital Corp. entered into a letter of intent to lease
or acquire three combustion turbines and is currently negotiating the terms
of a definitive agreement. The aggregate price, including construction of
related facilities, is estimated to be approximately $175 million. Capital
Corp. is considering various financing alternatives.
As of March 31, 1999, Capital Corp. had expended approximately $82.5
million in connection with its October 1998 purchase of two natural gas
combustion turbines. The aggregate purchase price, including costs of
installation, is approximately $125 million, which is expected to be
largely funded through additional borrowing by Capital Corp. Capital Corp.
expects to complete the purchase by August 1999. In addition, LG&E and KU
have filed an application with the PSC requesting approval for the purchase
of these turbines from Capital Corp. at cost. Assuming approval is
granted, the transfer of the turbines is expected to occur in August 1999.
If approval is not granted by the PSC, Capital Corp. will operate and
market the power of these gas turbines.
On March 15, 1999, the partnership that owns the Rensselaer cogeneration
facility sold substantially all the assets and major contracts of the
facility. For more information, see "Results of Operations" below, Note 4
of Notes to Financial Statements under Item 1 and the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
General
The Company's principal subsidiaries are LG&E, an electric and gas utility,
KU, an electric utility, and LG&E Capital Corp. (Capital Corp.), the
holding company for all non-
utility investments.non-utility investments other than trading
operations. LG&E's and KU's results of operations and liquidity and
capital resources are important factors affecting the Company's
consolidated results of operations and capital resources and liquidity.
On February 28, 2000, the Company announced that its Board of Directors
accepted an offer to be acquired by PowerGen for cash of approximately $3.2
billion or $24.85 per share and the assumption of $2.2 billion of the
Company's debt. For more information, see Note 2 of Notes to Financial
Statements under Item 1.
Some of the matters discussed in the Notes to Consolidated Financial
Statements and Management's Discussion and Analysis may contain forward-
looking statements that are subject to certain risks, uncertainties and
assumptions. Actual results may vary materially. Factors that could cause
actual results to differ materially include, but are not limited to:
general economic conditions; business and competitive conditions in the
energy industry; future prices of power and natural gas; unusual weather;
regulatory decisions, including decisions resulting from the combination of
LG&E Energy and KU Energy; the Company's ability to resolve Year 2000
issues in a timely mannerdecisions; and other factors described from time to time in the
Company's reports to the Securities and Exchange Commission, including
Exhibit 99.01 to the Form 10-K for the year ended December 31, 1998.
- 27 -
1999.
Results of Operations
The results of operations for LG&E, KU and Capital Corp.'s Argentine gas
distribution and WKE operations are affected by seasonal fluctuations in
temperature and other weather-related factors. Because of these and other
factors, the results of one interim period are not necessarily indicative
of results or trends to be expected for the full year.
Three Months Ended March 31, 1999,2000, Compared to
Three Months Ended March 31, 19981999
The Company's diluted earnings per share from continuing operations increaseddecreased to
$.23 in 2000 from $.44 in 1999 from $.36 in 1998.1999. The increasedecrease resulted from higher earnings at KU, anrecording non-
recurring after-tax gaincharges of $8.9$12.5 million ($.07) on.10 per share) in March
2000, and from recognizing one-time after-tax gains totaling $10.3 million
($.08 per share) in 1999. The non-recurring after-tax charges represent
$12.1 million of costs associated with the saleintegration of the Company's two
utilities operations (the One-Utility Program) and $0.4 million of merger
costs incurred by the Company relating to its proposed merger with PowerGen
plc. The gains in 1999 resulted from selling the Company's interest in the
Rensselaer, New York, project ($8.9 million, or $.07 per share) and after-
tax income of $5.3a
bankruptcy settlement received in connection with the Company's windpower
partnerships ($1.4 million, ($.04) for fees related to the development of an
independent power project in Gregory, Texas. Lower earnings at LG&E, an
increase in interest expense at Capital Corp. and higher corporate expenses
partially offset these increases.or $.01 per share).
LG&E Results:
LG&E's net income decreased $4.5$1.6 million (19%(9%) for the quarter ended March
31, 1999,2000, as compared to the quarter ended March 31, 1998,1999, primarily
because of increased maintenance expenses and lower gas revenues resulting
from a declinemild weather, as the region recorded its mildest winter since
1931, increases in gas prices.supply expenses, fuel for electric generation, and
administrative and general operating expenses including a $4.9 million net
of tax one-time charge for the Company's One-Utility Program. These
expenses were partially offset by increased retailgas sales to ultimate
consumers, off-system electric sales, and wholesale salesthe reversal of electricity. Heating degree days
were 17% above 1998.a rate refund of
$.5 million net of tax. Excluding these one-time charges, LG&E's net
income would have increased $2.8 million.
- 26 -
A comparison of LG&E's revenues for the quarter ended March 31, 1999,2000, with
the quarter ended March 31, 1998,1999, excluding the reversal of an FAC refund
(which reduced
electric revenuesof $1.1 million which was offset by $1.9 million),an additional accrual for performance-
based ratemaking of $.3 million, reflects increases and decreases(decreases) which
have been segregated by the following principal causes:
Increase or
(Decrease)
(Thousandscauses (thousands of $):
Electric Gas
Cause Revenues Revenues
Sales to ultimate consumers:Retail sales:
Fuel and gas supply adjustments $ 2,983 $(20,019)
Merger surcredit (1,390)1,112 $10,006
Performance based rate reduction (1,179) -
Demand side management/revenue
decoupling (2,396) (5,395)Electric rate refunds (1,156) -
Variation in sales volume, merger
surcredit, etc. 6,976 9,248(4,065) (2,443)
Total retail sales 6,173 (16,166)
Sales for resale 5,925 (411)(5,288) 7,563
Wholesale sales 15,786 4,720
Gas transportation - net - (364)189
Other 38 (39)(12) 65
Total $12,136 $(16,980)$10,486 $12,537
Fuel for electric generation and gas supply expenses comprise a large
component of LG&E's total operating expenses. LG&E's electric and gas
rates contain a fuel adjustment clause and a gas supply clause,
respectively, whereby increases or decreases in the cost of fuel and gas
supply may be reflected in retail rates, subject to the approval of the
Public Service Commission of Kentucky. Fuel for electric generation
decreased $3.6increased $7.5 million (10%(23%)
- 28 -
for the quarter because of a decreasean increase in
generation ($3.611 million), partially offset by a lower cost of coal burned
($3.5 million). Gas supply expenses decreased $13.6increased $12.9 million (21%(26%) due to
decreasesincreases in net gas supply cost.
Power purchased increased $13.4Purchased decreased $1.3 million (140%(6%) due to a decrease in purchases
for wholesale sales for resale.($3.0 million), partially offset by higher purchases to
support off-system sales ($1.7 million).
Non-recurring charges of $5.0 million, after tax, include the costs
associated with the Company's One-Utility Program.
Other operation expenses decreased $3.2 million as compared to 1999. This
decrease resulted from decreases in pension expense, $1.2 million, and
various other administrative and general activities, $2 million.
Maintenance expenses increased $4.4decreased $.8 million (43%(6%) in 19992000 primarily due to
forceddecreases in scheduled outages at the Mill Creek generating station Units 1, 3,of $1.5 million, and 4 ($3.5
million) and increased storm related electric distribution
expenses ($.4
million)maintenance, $.6 million, partially offset by an increase in software and
communication equipment maintenance, of general plant ($.4 million).
Depreciation and amortization increased $.8 million in 1999 because of
additional utility plant in service.$1.3 million.
Variations in income tax expense are largely attributable to changes in
pre-
taxpretax income.
KU Results:
KU's net income increased $4.6decreased $9.5 million (18%(32%) for the quarter ended March
31, 1999,2000, as compared to the quarter ended March 31, 1998.1999. The increasedecrease
was mainly due to increasesa non-recurring charge of $6.6 million, after tax, made
in retail electric sales caused by an increase
in heating degree days.the first quarter of 2000 for costs associated
- 27 -
with further integration of KU and LG&E. Excluding this non-recurring
charge, net income decreased $2.9 million.
A comparison of KU's revenues for the quarter ended March 31, 1999,2000, with
the quarter ended March 31, 1998,1999, reflects increases and decreases(decreases) which
have been segregated by the following principal causes:causes (thousands of $):
Sales to ultimate consumers:
Fuel clause adjustments $ (790)867
Environmental cost recovery (638)(1,272)
Performance based rate reduction (893)
Merger surcredit (1,867)(452)
Electric rate refunds (3,389)
Variation in sales volume, etc. 9,4154,601
Total retail sales 6,120
Sales for resale 27,270(538)
Wholesale sales 1,309
Other 740(342)
Total $34,130
Retail sales increased due to a 5% increase in sales volumes in the
quarter, which is primarily the result of a 16% increase in heating degree
days. The increase in sales for resale (1,895,289 megawatt-hours versus
529,472 megawatt-hours) was primarily due to more aggressive marketing
efforts, efficiencies achieved from coordinated dispatch of a larger
available pool of generation following completion of the merger in May 1998
of LG&E Energy and KU Energy, and sales to LG&E of $4 million due to
economic dispatch following the merger.$ 429
Fuel for electric generation comprises a large segment of KU's total
operating expenses. KU's electric rates contain a fuel adjustment clause
(FAC), whereby increases or decreases in the cost of fuel are reflected in
retail rates, subject to the approval of the Public Service Commission of
Kentucky, The Virginia State Corporation Commission, and the Federal Energy
Regulatory Commission.
Fuel for electric generation increased $9.8decreased $2.5 million (20%(4%) for the quarter
because of an increasea decrease in generation ($10.21.5 million) which was partially
offset byand the lower cost of
coal burned ($.41 million).
- 29 -
Power purchased expenseNon-recurring charges of $6.6 million, after tax, include the costs
associated with the Company's One-Utility Program.
Other operating expenses increased $21by $1.7 million in 1999 because of a 94%(6%). The increase in megawatt-hour purchases which was
primarily attributable to increased transmission ($.6 million) and
distribution ($.4 million) system operating expenditures as well as
increased sales for resale and economic dispatch purchases from LG&E of
$2.5 million.
Other operating expense decreasedmarketing expenses ($.5 million).
Maintenance expenses increased by $2.8$1.6 million (9%(13%) due primarily to
increased maintenance at the steam generating plants ($1.3 million) and the
distribution system ($.5 million).
The decrease was
mainly attributableDepreciation and amortization increased by $2.3 million (11%) due to
a decreaseadditional utility plant in administrative and general expenses.service.
Variations in income tax expense are largely attributable to changes in
pretax income.
LG&E Capital Corp. and Other Results:
Capital Corp., the holding company for all non-utility investments,
conducts its operations through three principal segments: Independent
Power Operations WKE and Argentine Gas Distribution. Involvement in these
and other non-utility businesses represents the Company's commitment to
understand, respond to, and capitalize on the opportunities presented by an
emerging competitive energy services industry. Independent Power
Operations develops, operates, maintains and owns interests in domestic and
international power generation facilities that sell electric and steam
energy to utility and industrial customers, and owns equity interests in
combustion turbines which are leased to others. WKE leases and operates
the generating facilities of Big Rivers. Argentine Gas Distribution owns
interests in three natural gas distribution companies in Argentina.
Capital Corp. is also engaged in commercial and retail initiatives designed
to assess the energy and utility needs of large commercial and industrial
entities, provide maintenance and repair services for customers' major
household appliances and provide third party metering and billing services.
Independent Power Operations
Independent
Power Operations' revenues increaseddecreased from $5.2 million in 1998
to $6.9 million in 1999 as a result ofto $4.7
million in 2000. The decrease resulted mainly from recognizing income previously
deferredrevenues in
1999 related to the recentlyRensselaer project, which the Company sold Rensselaer project. The project sold
substantially all of its assets and major contracts in March
1999.
See
Note 4 of NotesPower Operations' operation and maintenance expense decreased from $3.6
million in 1999 to Financial Statements under Item 1.
Independent$1.6 million in 2000. The decrease resulted primarily
from writing off assets related to the Rensselaer project in 1999.
- 28 -
Power Operations' equity in earnings of unconsolidated ventures increaseddecreased
from $5.6$21.4 million in 19981999 to $21.4$5.8 million in 2000, due mainly to
recognizing a pretax gain or $14.5 million on the sale of the Rensselaer
project in 1999.
Western Kentucky Energy
Western Kentucky Energy Corp.'s (WKE's) revenues were approximately the
same in 2000 and 1999, $60.1 million and 60.0 million, respectively.
Higher smelter sales were offset by lower off-system sales resulting from
lower volumes and prices.
WKE's cost of revenues were approximately the same in 2000 and 1999, $35.3
million and $35.7 million, respectively.
WKE's operating expenses increased slightly in 2000 to $25.8 million from
$24.7 million in 1999. The increase reflected a pre-tax gain of $14.5 million that resulted from the Rensselaer
project's sale of substantially all of its assetswas due to more unit outages in 2000
and major contracts in
March 1999.
Independent Power Operations' other income increased by approximately $1.0
million in 1999 due primarily to the recognition of contract breakage
income associated with the Rensselaer sale in March 1999.
Western Kentucky Energy
WKE began operations July 15, 1998, after closing its lease transaction
with Big Rivers. WKE's revenues totaled $60.0 million in 1999. WKE's cost
of revenues, primarily composed of fuel and purchased power expenses,
amounted to $35.7 million. Operation and maintenance expenses of $24.7
million include $7.0 million of rent expense associated with the lease of
Big Rivers' operating facilities. WKE incurred interest expense of
approximately $1.4 million associated with borrowings to fund the initial
purchase of certain materials and supplies from Big Rivers and to prepay
the first two years' lease payments of $55.9 million.higher depreciation expense.
Argentine Gas Distribution
The Argentine Distribution companies' revenues increased 9% or $2.4of $30.7 million, cost of
revenues of $16.9 million and operation and maintenance expenses of $5.7
million in 2000 were slightly higher than 1999 to $29.5 million due to higher consumption
per customer and an
increase in the customer base.
- 30 -
Operation and maintenance expenses increased by 4.5% or $1.0 million over
the same period due to higher consumption.customer.
Other
The Company has entered into various commercial and retail initiatives to
position itself for growth in the energy industry. The commercial
initiatives represent new businesses and products designed to leverage the
Company's existing assets and experience, and to gain access to new
markets. Our retail initiatives enhance value for LG&E's and KU's
customers and are designed to help ensure that LG&E and KU remain the
utility of choice within their respective service areas when a fully
competitive industry framework takes shape. These commercial and retail
initiatives have not had a significant impact on the Company's financial
position or required significant capital investment. We remain optimistic
that these non-traditional developing ventures will add to our knowledge
base as well as our financial results in the future.
Capital Corp.'s otherOther revenues increased from $1.5 million in 1998 to $31.8$65.1 million in 1999 due to $75.0 million in
2000. The increases resulted from acquiring CRC-Evans in July 1999 and
increased sales in the Company's natural gas gathering and processing and
energy marketing businesses, partially offset by a decrease in Retail
Access Services' starting operationsrevenues and a decrease resulting from recognizing fees in
1999 related to the second quarterdevelopment of 1998 and to Capital Corp.'s selling 50% of its interest
in an independent power project it is developing in Gregory,
Texas.
Capital Corp.'s other incomeOther cost of revenues increased $2.6from $47.9 million in 1999 due mainly to receiving$60.6
million in 2000. The increases resulted from acquiring CRC-Evans in July
1999 and increased sales in the Company's natural gas gathering and
processing and energy marketing businesses, partially offset by a decrease
at Retail Access Services.
Other income for Capital Corp. and Other increased from $3.3 million in
1999 to $4.2 million in 2000. The increase resulted from higher interest
income and the gain on the sale of the Company's interest in CEC-APL L.P.
Decreases resulting from payments received in 1999 related to the
Rensselaer sale and the initial settlement of a claim related toon an undeveloped
independent power project in California.
InterestCalifornia partially offset the increases.
Capital Corp. and Other interest expense increased by $4.7from $10.2 million (87%) in
1999 mainly due to $13.2 million in 2000. The increase resulted from funding
discontinued operations, corporate operating expenses, and corporate expenses.the Gas BAN and
CRC acquisitions. The Company's consolidated effective income tax rate
increaseddecreased from 33.5% in 1998 to
38.0%38.1% in 1999 to 35.0% in 2000 due to favorably resolving tax audits in 1998 and to changes
in the provision for state income taxes. A decreasean increase in
investment and otherwind tax credits as a percent of pretax income also contributed to the
increase.income.
Liquidity and Capital Resources
The Company's need for capital funds is largely related to the construction
of plant and equipment necessary to meet the needs of electric and gas
utility customers and equity investments in connection with independent
power production projects and other energy-related growth or acquisition
opportunities among the non-utility businesses. Capital funds are also
needed for the Company's capital obligations under the Big Rivers lease
arrangements, losses incurred in connection with the discontinuance of the
merchant energy trading and sales business, information system
enhancements, and other business developmentdevelop
- 29 -
ment opportunities. Fluctuations in the Company's discontinued energy
marketing and trading activities also affected liquidity throughout the
quarter. Lines of credit and commercial paper programs are maintained to
fund these temporary capital requirements.
Construction expenditures for the three months ended March 31, 1999,2000, of
$79.0$53.7 million were financed with internally generated funds.funds and commercial
paper.
The Company's combined cash and marketable securities balance increased
$17.2$17.6 million during the three months ended March 31, 1999.2000. The increase
reflects cash flows from operations a net increase in debt, and the
Company's portion of the proceeds received by the Rensselaer project from the sale
of its assets and major contracts,CEC-APL L.P., partially offset by construction expenditures, the investment in BAN,debt
repayments and dividends paid.
Variations in accounts receivable, accounts payable and materials and
supplies are generally not significant indicators of the Company's
liquidity. Such variations are primarily attributable to fluctuations in
weather, which have a direct effect on sales of electricity and natural
gas. The decreasedecreases in accounts receivable and accounts payable resulted
mainly from seasonal fluctuations at LG&E, KU and the Company's natural gas
gathering and processing business. The decrease in fuel resulted from
seasonal fluctua
- 31 -
tions in KU'sfluctuations at KU and Centro's businesses, partially offset by an increase
resulting from higher revenues at Retail Access Services. The decrease in
accounts payable resulted from fluctuations in LG&E's and KU's businesses,WKE, and the decrease in gas stored
underground resulted from seasonal fluctuations inat LG&E and the natural gas
gathering and processing business.
Long-term debt decreased by $20 million due to the redemption of LG&E's
business. The increasefirst mortgage bonds 7.5% series due July 1, 2002, in other current liabilities
resulted from differences in the timing of income tax payments.
The increase in investments in unconsolidated ventures resulted from the
investment in BAN and equity in earnings, partially offset by distributions
received.
The increase in non-utility property and plant resulted mainly from
additions at Centro. The increase in other property and investments
resulted from expenditures related to the purchase of two natural gas
turbines by Capital Corp.
The Company issues commercial paper that has maturity dates ranging between
one and 270 days. Because of the rollover of these maturity dates, total
short-term borrowings during the first three months of 1999 were $416.2
million and total repayments of short-term borrowings were $346.2 million.
See Note 16 of the Company's Notes to Financial Statements contained in its
Annual Report on Form 10-K for the year ended December 31, 1998.
In October 1998, Capital Corp. entered into a contract to purchase two
natural gas turbines. Capital Corp. anticipates that the turbines or their
electrical output, if operated, would be marketed or sold to one or more
affiliated or unaffiliated third parties. The aggregate purchase price,
including costs of installation, for the turbines is approximately $125
million, which is expected to be largely funded through additional
borrowing by Capital Corp. As of March 31, 1999, Capital Corp. had
expended approximately $82.5 million for the turbines and expects to
complete the purchase by August 1999.
On March 15, 1999, Capital Corp. entered into a letter of intent to acquire
three combustion turbines and is currently negotiating the terms of a
definitive agreement. The aggregate price, including construction of
related facilities, is estimated to be approximately $175 million. Capital
Corp. is considering various financing alternatives.January 2000.
At March 31, 1999,2000, unused capacity under the Company's lines of credit
totaled $466.6$415.4 million after considering commercial paper support and
approximately $58.7$40.0 million in letters of credit securing on- and off-
balance sheet commitments. At December 31, 1998, unused capacity under the
linesIn March 2000, KU finalized an uncommitted line
of credit totaled $536.8for $60 million.
Standard and Poor's downgraded LG&E's, KU's and Capital Corp.'s debt
ratings on February 28, 2000. The decrease in unused capacity
resulted from borrowing fundsdowngrades reflect S&P's opinion of the
credit quality of the Companies following the impact of the PBR and the OPC
decision. S&P, Moody's and Duff and Phelps continue to meet working capital needs.have the debt of
the Companies on credit watch pending review of the financial condition
following consummation of the merger of the Company with PowerGen.
The Company's capitalization ratios at March 31, 1999,2000, and December 31,
1998,1999, follow:
Mar. 31, Dec. 31,
2000 1999 1998
Long-term debt (including current portion) 45.2% 46.4%49.8% 49.8%
Notes payable 13.0 11.213.1
Preferred stock 4.1 4.24.0 3.9
Common equity 37.7 38.233.2 33.2
Total 100.0% 100.0%
- 32 -
LG&E's capitalization ratios at March 31, 1999,2000, and December 31, 1998,1999,
follow:
Mar. 31, Dec. 31,
2000 1999 1998
Long-term debt (including current portion) 45.1% 45.0%40.0% 41.1%
Notes payable 8.7 7.9
Preferred stock 6.9 6.86.3 6.2
Common equity 48.0 48.245.0 44.8
Total 100.0% 100.0%
- 30 -
KU's capitalization ratios at March 31, 1999,2000, and December 31, 1998,1999,
follow:
Mar. 31, Dec. 31,
2000 1999 1998
Long-term debt (including current portion) 45.4% 45.7%44.9% 44.7%
Preferred stock 3.3 3.43.3
Common equity 51.3 50.951.8 52.0
Total 100.0% 100.0%
On May 7, 1999, Capital Corp. issued $150.0 million of medium-term notes
due May 2004, with a stated interest rate on the notes of 6.205%. After
taking into account the forward-starting interest-rate swap entered into on
April 9, 1999, to hedge the entire issuance, the effective rate will be
6.13%. The proceeds were used to repay a portion of Capital Corp.'s
outstanding commercial paper, which had been used to fund the BAN
acquisition and other working capital needs.
For a description of significant contingencies that may affect the Company,
LG&E and KU, reference is made to Part II herein - Item 1, Legal
Proceedings.
Year 2000 Computer Issue
The Company and its subsidiaries, including LG&E and KU, use various
software, systems and technology that may be affected by the "Year 2000
Issue." This concerns the ability of electronic processing equipment
(including microprocessors embedded in other equipment) to properly process
the millennium change to the year 2000 and related issues. A failure to
timely correct any such processing problems could result in material
operational and financial risks if significant systems either cease to
function or produce erroneous data. Such risks are more fully detailed in
the sections that follow, but could include an inability to operate its
generating plants, disruptions in the operation of transmission and
distribution systems and an inability to access interconnections with the
systems of neighboring utilities.
The Company began its project regarding the Year 2000 issue in 1996. The
Board of Directors has approved the general Year 2000 plan and receives
regular updates. In addition, monthly reporting procedures have been
established at senior management levels. Since 1996, a single-purpose Year
2000 team has been established in the Information Technology (IT)
Department. This team, which is headed by an officer of the Company, is
responsible for planning, implementing and documenting the Company's Year
2000 process. The team also provides direct and detailed assistance to the
Company's operational divisions and smaller units, where identified
personnel are responsible for Year 2000 work and remediation in their
specific areas. In many cases, the Company also uses the services of third
parties, including technical consultants, vendor representatives and
auditors.
- 33 -
The Company's Year 2000 effort generally follows a three phase process:
Phase I - inventory and identify potential Year 2000 issues, determine
solutions;
Phase II - survey vendors regarding their Year 2000 readiness, determine
solutions to deal with possible vendor non-compliance, develop work
plans regarding Company and vendors non-compliance issues; and
Phase III - implementation, testing, certification, contingency
planning.
The Company has long recognized the complexity of the Year 2000 issue.
Work has progressed concurrently on (a) replacing or modifying IT systems,
including mainframes, client-server, PCs and software applications, (b)
replacing or modifying non-IT systems, including embedded systems such as
mechanical control units and (c) evaluating the readiness of key third
parties, including customers, suppliers, business partners and neighboring
utilities.
State of Readiness
As of March 1999, the Company and its subsidiaries have substantially
completed the internal inventory, vendor survey and compliance assessment
portions (Phases I and II) of their Year 2000 plan for mission critical
mainframe and PC hardware and software. Remediation efforts (Phase III) in
these areas are approximately 75% complete. With respect to non-IT
embedded systems, the Company, LG&E and KU also have substantially
completed their Phase I and Phase II efforts and Phase III remediation
efforts are in progress. Testing has commenced and will continue as
remediation efforts are implemented and are expected to run until July
1999. Contingency planning has been initiated for all IT and non-IT
mission critical systems and will continue throughout 1999.
As a general matter, corrective action for major IT systems, including
customer information, financial and trading systems, are in process or have
been completed. For smaller or more isolated systems, including embedded
and plant operational systems, the Company has completed much of the
evaluative process and is commencing corrective plans. The Company has
communicated with its key suppliers, customers and business partners
regarding their Year 2000 progress, particularly in the IT software and
embedded component areas, to determine the areas in which the Company's
operations are vulnerable to those parties' failure to complete their
remediation efforts. The Company is currently evaluating and, in certain
cases, initiating follow-up actions regarding the responses from these
parties. The Company regularly attends and participates in trade group
efforts focusing on Year 2000 issues in the energy industry.
Costs of Year 2000 Issues
The Company's, LG&E's and KU's system modification costs related to the
Year 2000 issue are being expensed as incurred. Through March 1999, the
Company has incurred approximately $22.1 million in capital and operating
costs in connection with the Year 2000 issue. Based upon studies and
projections to date, the Company expects to spend an additional $10.0
million to complete its Year 2000 efforts.
Through March 1999, LG&E has incurred approximately $17.0 million in
capital and operating costs in connection with the Year 2000 issue. Based
upon studies and projections to date, LG&E expects to spend an additional
$3.6 million to complete its Year 2000 efforts.
Through March 1999, KU has incurred approximately $3.3 million in capital
and operating costs in connection with the Year 2000 issue. Based upon
studies and projections to date, KU expects to spend an additional $3.6
million to complete its Year 2000 efforts.
- 34 -
It should be noted that these figures include total hardware, software,
embedded systems and consulting costs. In many cases, these costs include
system replacements which were already contemplated or which provided
additional benefits or efficiencies beyond the Year 2000 aspect.
Additionally, many costs are not incremental costs but constitute
redeployment of existing IT and other resources. These costs represent
management's current estimates; however, there can be no assurance that
actual costs associated with the Company's Year 2000 issues will not be
higher.
Risks of Year 2000 Issues
As described above, the Company has made significant progress in the
implementation of its Year 2000 plan. Based upon the information currently
known regarding its internal operations and assuming successful and timely
completion of its remediation plan, the Company does not anticipate
material business disruptions from its internal systems due to the Year
2000 issue. However, the Company may possibly experience limited
interruptions to some aspects of its activities, whether IT, generation,
transmission or distribution, operational, administrative functions or
otherwise, and the Company is considering such potential occurrences in
planning for the most reasonably likely worst-case scenarios.
Additionally, risk exists regarding the non-compliance of third parties
with key business or operational importance to the Company. Year 2000
problems affecting key customers, interconnected utilities, fuel suppliers
and transporters, telecommunications providers or financial institutions
could result in lost power or gas sales, reduced power production or
transmission capabilities or internal operational or administrative
difficulties on the part of the Company. The Company is not presently
aware of any such situations; however, severe occurrences of this type
could have material adverse impacts upon the business, operating results or
financial condition of the Company. There can be no assurance that the
Company will be able to identify and correct all aspects of the Year 2000
problem among these third parties that affect it in sufficient time, that
it will develop adequate contingency plans or that the costs of achieving
Year 2000 readiness will not be material.
Contingency planning is under way for material areas of Year 2000 risk.
This effort will address certain areas, including the most reasonably
likely worst-case scenarios and delays in completion in the Company's
remediation plans, failure or incomplete remediation results and failure of
key third parties to be Year 2000 compliant. Contingency plans will
include provisions for extra staffing, back-up communications, review of
unit dispatch and load shedding procedures, carrying of additional energy
reserves and manual energy accounting procedures. Completion of
contingency plan formulation is scheduled for June 1999.
Forward Looking Statements
The foregoing discussion regarding the timing, effectiveness,
implementation, and cost of the Company's Year 2000 efforts, contains
forward-looking statements, which are based on management's best estimates
derived using assumptions. These forward-looking statements involve
inherent risks and uncertainties, and actual results could differ
materially from those contemplated by such statements. Factors that might
cause material differences include, but are not limited to, the
availability of key Year 2000 personnel, the Company's ability to locate
and correct all relevant computer codes, the readiness of third parties,
and the Company's ability to respond to unforeseen Year 2000 complications
and other factors described from time to time in the Company's reports to
the Securities and Exchange Commission, including Exhibit 99.01 to the Form
10-K for the year ended December 31 1998. Such material differences could
result in, among other things, business disruption, operational problems,
financial loss, legal liability and similar risks.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
LG&E Energy is exposed to market risks in both its regulated and non-
utility operations. Both operations are exposed to market risks from
changes in interest rates and commodity prices, while the non-utility
operations are also exposed to changes in foreign exchange rates. To
mitigate changes in cash flows attributable to these exposures, the Company
has entered into various derivative financial instruments. Derivative positions are
monitored using techniques that include market value and sensitivity
analysis.
The potential change in interest expense resulting from changes in base
interest rates of the Company's unswapped debt did not change materially in
the first quarter of 1999.2000. The potential changes in the fair values of the
Company's interest-rate swaps resulting from changes in interest rates and
the yield curve also did not change materially in the first quarter of
1999.2000. The Company's exposure to market risks from changes in commodity
prices and foreign exchange rates remained immaterial in the first quarter
of 1999.2000.
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Part II. Other Information
Item 1. Legal Proceedings.
For a description of the significant legal proceedings involving the
Company, LG&E and KU, reference is made to the information under the
following items and captions of the Company's, LG&E's and KU's respective
combined Annual Report on Form 10-K for the year ended December 31, 1998:1999:
Item 1, Business; Item 3, Legal Proceedings; Item 7, Management's
Discussion and Analysis of Results of Operations and Financial Condition;
Notes 2, 5,6, 18 and 22 of the Company's Notes to Financial Statements under
Item 8; Notes 3, 12 16 and 1816 of LG&E's Notes to Financial Statements under
Item 8 and Notes 3, 11 and 1314 of KU's Notes to Financial Statements under
Item 8. Except as described herein, to date, the proceedings reported in
the Company's, LG&E's and KU's respective combined Annual Report on Form 10-K10-
K have not changed materially.
Certain Fuel Adjustment Clause ProceedingsPowerGen Merger Regulatory Filings
On April 1, 1999, LG&E filedFebruary 28, 2000, the Company announced the signing of a notice of appeal in the Circuit Court of
Franklin County, Kentucky appealing certain rulingsdefinitive
merger agreement with PowerGen plc of the United Kingdom, wherein, upon
closing, the Company will become a wholly-owned subsidiary of PowerGen and
shareholders of the Company will receive $24.85 per share of Company common
stock. The transaction is scheduled to be completed nine to twelve months
from announcement, subject to receipt of required regulatory approvals and
other conditions to consummation. Applications for approval were filed
with the Kentucky Commission, the Virginia State Corporation Commission and
the FERC (under the Federal Power Act) in March 2000, and with the SEC
(under the Public ServiceUtility Holding Company Act of 1935) in April 2000.
Approval applications or notice filings will also be made to the Tennessee
Regulatory Authority, to the Department of Justice and the Federal Trade
Commission (PSC) requiring refunds(under the Hart-Scott-Rodino Antitrust Improvements Act of approximately $3.9 million
(as of February 1999) in costs previously recovered from customers1976)
and as required under the fuel adjustment clause mechanism."Exon-Florio" US Omnibus Trade and
Competitiveness Act of 1988. PowerGen has made standard filings with the
United Kingdom Office of Fair Trading under the Fair Trading Act of 1973,
which implements a voluntary regulatory regime.
Hearings before the Kentucky Commission were held April 19-21 and
submissions of briefs and data requests have been completed. A decision is
expected on or about May 15 and the Company will have approximately 23 days
from any order in which to file for rehearing, or approximately 33 days in
which to file for appeal. While the Company and PowerGen believe that they
will receive the requisite regulatory approvals for the merger in
sufficient time to complete the transaction on the schedule mentioned
above, there can be no assurance as to the timing of such approvals or the
ability to obtain such approvals on satisfactory terms or otherwise. See
Item 3, Legal Proceedings,1, PowerGen Merger and Notes 5 andNote 22 to the Company's and Notes 3 and 16 of LG&E's respective Notes to Financial
Statements under Item 8 of the Company's and LG&E's
combinedits Annual Report on Form 10-K for the year
ended December 31, 1998,
for further discussion of this matter.
Kenetech Bankruptcy
In April 1999 the Windpower Partners 1993, Windpower Partners 1994 and KW
Tarifa, S.A. projects in which the Company owns certain interests received
initial distributions aggregating approximately $12.7 million, as well as
certain other assets, in connection with these projects' claims in the
bankruptcy proceeding of Kenetech Windpower, Inc. The funds are currently
held in trust and will be used to pay legal fees and unpaid interest on
debt of the projects, as appropriate. The Company expects to record a pre-
tax gain of approximately $2.5 million during the second quarter of 1999 in
connection with these initial distributions. See Item 3, Legal
Proceedings, and Note 18 of the Company's Notes to Financial Statements
under Item 8 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, for further discussion of this matter.
Performance-Based Ratemaking
On April 13, 1999, the PSC issued initial orders in the performance-based
ratemaking proceedings (PBR) for LG&E and KU. The PSC orders implement,
effective July 2, 1999, and subject to modification, the companies' pending
PBR proposals, including a five-year, $52 million rate reduction plan
agreed upon by LG&E, KU and the Kentucky Attorney General's Office and
previously filed with the PSC on April 5, 1999. Further proceedings in the
PBR case, including consideration of rate reductions requested by certain
intervenors, are scheduled for the second and third quarters of 1999. See
Note 6 to the Notes to Financial Statements of the Company, LG&E and KU
contained in Item 1 of this Form 10-Q and Item 3, Legal Proceedings, to the
Company's, LG&E's and KU's combined Annual Report on Form 10-K for further discussion of this matter.
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Item 6(a). Exhibits.
Exhibit
Number Description
27 Financial Data Schedules for LG&E Energy Corp.,
Louisville Gas and Electric Company, and Kentucky
Utilities Company.
Item 6(b). Reports on Form 8-K.
On February 11, 1999, the Company filed a report on Form 8-K announcing
that it had realigned its management structure to support its strategy of
aggressively growing the company as the energy services industry moves
toward deregulation.
On March 23, 1999,January 6, 2000, the Company filed a report on Form 8-K announcing that
on March 15,December 21, 1999, LG&E-Westmoreland Rensselaer, a California general
partnership in which LG&E Energy owns a 50% interest, completedit received an adverse order from the sale of
substantially all the assets and major contracts ofarbitration
panel considering its 79 MW gas-fired
cogeneration facility in Rensselaer, New York to Fulton Cogeneration
Associates, L.P., an affiliate of The Coastal Corporation.contract dispute with OPC.
On April 7, 1999,January 25, 2000, the Company LG&E and KU filed reportsa report on Form 8-K announcing that
on April 5, 1999,January 7, 2000, it issued a statement regarding the Kentucky
Commission's decision in the PBR case involving its two utility
subsidiaries, LG&E and KU had reached an agreement with
the Kentucky Attorney General's Office regarding LG&E's and KU's pending
performance-based ratemaking (PBR) proposal. In a filing with the PSC, the
parties amended the companies' PBR proposal to request approval of an
agreed-upon five-year rate reduction plan. In the same filing,KU.
On February 29, 2000, the Company announced that on March 30, 1999, it had acquired an indirect ownership
interest of approximately 20 percent in Gas Natural BAN, S.A.
On April 20, 1999, the Company, LG&E and KU filed reportsa report on Form 8-K announcing
ordersthat on February 27, 2000, it and PowerGen entered into an Agreement and
Plan of the PSC dated April 13, 1999, regarding LG&E and KU.
The PSC orders implement, effective July 2, 1999, the companies' pending
performance-based ratemaking proposal, including a five-year rate reduction
plan agreed upon earlier by the companies and the Kentucky Attorney
General's Office.Merger.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LG&E Energy Corp.
Registrant
Date: May 14, 199915, 2000 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Louisville Gas and Electric Company
Registrant
Date: May 14, 199915, 2000 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kentucky Utilities Company
Registrant
Date: May 14, 199915, 2000 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
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