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 SeptemberJune 30, 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 October 29, 1999.July 31, 2000.
Louisville Gas and Electric Company
21,294,223 shares, without par value, as of October 29, 1999,July 31, 2000,
all held by LG&E Energy Corp.
Kentucky Utilities Company
37,817,878 shares, without par value, as of October 29, 1999,July 31, 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 43
Consolidated Statements of Cash Flows 65
Consolidated Statements of Retained Earnings 87
Consolidated Statements of Comprehensive Income 98
Louisville Gas and Electric Company
Statements of Income 109
Balance Sheets 1110
Statements of Cash Flows 1312
Statements of Retained Earnings 1413
Statements of Comprehensive Income 1514
Kentucky Utilities Company
Statements of Income 1615
Balance Sheets 1716
Statements of Cash Flows 1918
Statements of Retained Earnings 2019
Notes to Financial Statements 2120
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 3227
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 4637
PART II
Item 1 Legal Proceedings 4838
Item 4 Submission of Matters to a Vote of Security Holders 39
Item 6 Exhibits and Reports on Form 8-K 4940
Signatures 5041
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 NineSix Months
Ended Ended
Sep.June 30, Sep.June 30,
2000 1999 19982000 1999 1998
REVENUES:
Electric utility $ 557,711376,606 $ 447,796 $1,325,642 $1,130,062406,258 $ 742,496 $ 767,931
Gas utility 17,623 16,978 117,054 136,27729,979 23,652 118,295 99,431
International and
non-utility 297,391 164,402 652,951 315,589
Total revenues 872,725 629,176 2,095,647 1,581,928
Provision for rate
refunds (Note 12) (7,335) - (7,335) -199,706 193,747 370,890 355,560
Net revenues 865,390 629,176 2,088,312 1,581,928606,291 623,657 1,231,681 1,222,922
OPERATING EXPENSES:
Fuel and power purchased 413,713 206,044 869,795 457,984206,509 250,994 409,705 456,082
Gas supply expenses 82,248 53,137 234,232 220,67188,675 56,920 207,903 151,984
Utility operation and
maintenance 103,789 106,997 322,686 320,06198,257 115,192 202,115 218,897
International and non-
utility operation
and maintenance 48,905 57,003 141,303 96,90756,210 47,434 104,748 92,398
Depreciation and
amortization 54,664 51,378 162,879 155,030
Merger costs to
achieve56,802 53,479 115,175 108,215
Asset impairment charge
(Note 4) 45,000 - 45,000 -
Non-recurring charges
(Notes 2 and 3) 14,676 - 65,31835,389 -
Total operating expenses 703,319 474,559 1,730,895 1,315,971566,129 524,019 1,120,035 1,027,576
Equity in earnings
of unconsolidated
ventures (Notes 5 and(Note 6) 10,092 2,744 43,799 59,60710,760 12,051 16,690 33,707
OPERATING INCOME 172,163 157,361 401,216 325,56450,922 111,689 128,336 229,053
Other income 5,863 2,840 14,862 5725,707 2,611 10,716 8,999
Interest charges and
preferred dividends 32,414 26,833 95,177 79,12736,919 32,243 71,884 62,763
Minority interest 4,735 4,459 10,148 9,1044,520 3,842 6,014 5,413
Income before income taxes 140,877 128,909 310,753 237,90515,190 78,215 61,154 169,876
Income taxes 53,711 50,055 116,843 99,8303,841 28,250 19,923 63,132
Income from continuing
operations $ 87,16611,349 $ 78,85449,965 $ 193,91041,231 $ 138,075106,744
- 1 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income (cont.)
(Unaudited - Thousands of $ Except Per Share Data)
Three Months NineSix Months
Ended Ended
Sep.June 30, Sep.June 30,
2000 1999 19982000 1999 1998
Income from continuing
operations $ 87,16611,349 $ 78,85449,965 $ 193,91041,231 $ 138,075
Loss106,744
(Loss) income from disposal of
discontinued operations, net of
income tax expense benefit (expense)
of $15,008
(Notes 2$94,476 and 3)($328)
(Note 5) (155,000) - - - (22,852)
Income (loss) on disposal of dis-
continued operations, net of
income tax (expense) benefit
of $(243), $(328) and
$124,757 (Notes 2 and 3) - 658(155,000) 788 (224,342)
Income (loss) before cum-
ulative effect of change
in accounting principle 87,166 79,512 194,698 (109,119)
Cumulative effect of change
in accounting for start-up
costs, net of income tax
benefit of $5,061 - - - (7,162)
NET INCOME (LOSS) $(143,651) $ 87,16649,965 $ 79,512 (113,769)$ 194,698107,532
Average common shares
outstanding 129,677 129,677 129,677 129,677
Earnings (loss) per share -
basic and diluted:
Continuing operations $ (116,281).09 $ .39 $ .32 $ .82
(Loss) income from dis-
posal of discontinued
operations (1.20) .00 (1.20) .01
Total $ (1.11) $ .39 $ (.88) $ .83
The accompanying notes are an integral part of these financial statements.
- 2 -
LG&E Energy Corp. and Subsidiaries
Consolidated StatementsBalance Sheets
(Thousands of Income (cont.)
(Unaudited$)
ASSETS
(Unaudited)
June 30, Dec. 31,
2000 1999
CURRENT ASSETS:
Cash and temporary cash investments $ 57,291 $ 91,413
Marketable securities 8,558 10,126
Accounts receivable - Thousands of $ Except Per Share Data)
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
Average common shares
outstanding 129,677 129,683 129,677 129,683
Earnings (loss) per shareless reserve 313,139 318,914
Materials and supplies - basic:
Continuing operations $ .67 $ .61 $ 1.49 $ 1.06
Discontinued operations .00 .00 .00 (.17)
Income (loss) on dis-
posal of discontinued
operations .00 .00 .01 (1.73)
Cumulative effect of
accounting change .00 .00 .00 (.06)primarily at average cost:
Fuel (predominantly coal) 82,669 91,931
Gas stored underground 25,340 49,038
Other 96,186 90,259
Prepayments and other 46,955 54,038
Total $ .67 $ .61 $ 1.50 $ (.90)
Earnings (loss) per sharecurrent assets 630,138 705,719
UTILITY PLANT:
At original cost 6,021,543 5,916,905
Less: reserve for depreciation 2,603,334 2,503,851
Net utility plant 3,418,209 3,413,054
OTHER PROPERTY AND INVESTMENTS - diluted:
Continuing operations $ .67 $ .61 $ 1.49 $ 1.06
Discontinued operations .00 .00 .00 (.16)
Income (loss) on dis-
posal of discontinued
operations .00 .00 .01 (1.73)
Cumulative effect of
accounting change .00 .00 .00 (.06)LESS RESERVES:
Investment in unconsolidated
ventures (Note 6) 243,948 249,455
Non-utility property and plant, net 430,336 477,442
Other 50,926 25,596
Total $ .67 $ .61 $ 1.50 $ (.89)other property and investments 725,210 752,493
DEFERRED DEBITS AND OTHER ASSETS 263,805 262,491
Total assets $5,037,362 $5,133,757
The accompanying notes are an integral part of these financial statements.
- 3 -
LG&E Energy Corp. and Subsidiaries
Consolidated Balance Sheets (cont.)
(Thousands of $)
ASSETSCAPITAL AND LIABILITIES
(Unaudited)
Sep.June 30, Dec. 31,
2000 1999
1998
CURRENT ASSETS:
Cash and temporary cash investmentsLIABILITIES:
Current portion of long-term debt $ 93,007375,506 $ 105,726
Marketable securities 11,458 20,862411,810
Notes payable 413,660 449,578
Accounts receivable - less reserve 377,693 293,219
Materials and supplies - primarily at average cost:
Fuel (predominantly coal) 82,614 78,855
Gas stored underground 49,143 39,249
Other 93,797 72,457payable 192,382 220,460
Net assetsliabilities of discontinued opera-
tions (Notes 2 and 3) 36,380 3,219
Prepayments(Note 5) 291,905 158,222
Other 226,031 248,841
Total current liabilities 1,499,484 1,488,911
Long-term debt 1,404,441 1,299,415
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 587,722 585,880
Investment tax credit, in
process of amortization 81,849 85,828
Regulatory liability 96,799 104,795
Other 172,840 182,357
Total deferred credits and other 41,810 38,287liabilities 939,210 958,860
Minority interests 106,379 109,952
Cumulative preferred stock 142,640 135,328
COMMON EQUITY:
Common stock, without par value -
129,677,030 shares outstanding 777,013 777,013
Other (1,926) (1,956)
Retained earnings 170,121 366,234
Total current assets 785,902 651,874
UTILITY PLANT:
At original cost 5,851,448 5,581,667
Less: reserve for depreciation 2,478,866 2,352,306
Net utility plant 3,372,582 3,229,361
OTHER PROPERTY AND INVESTMENTS - LESS RESERVES:
Investment in unconsolidated
ventures (Notes 5common equity 945,208 1,141,291
Total liabilities and 6) 231,690 167,877
Non-utility property and plant, net 493,623 447,372
Other 36,393 117,321
Total other property and investments 761,706 732,570
DEFERRED DEBITS AND OTHER ASSETS 267,894 214,152
Total assets $5,188,084 $4,827,957capital $5,037,362 $5,133,757
The accompanying notes are an integral part of these financial statements.
- 4 -
LG&E Energy Corp. and Subsidiaries
Consolidated Balance Sheets (cont.)
(Thousands of $)
CAPITAL AND LIABILITIES
(Unaudited)
Sep. 30, Dec. 31,
1999 1998
CURRENT LIABILITIES:
Long-term debt due within one year $ 111,590 $ -
Notes payable 393,202 365,135
Accounts payable 218,882 243,968
Other 351,523 242,479
Total current liabilities 1,075,197 851,582
Long-term debt 1,599,603 1,510,775
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 558,609 570,698
Investment tax credit, in
process of amortization 87,844 93,844
Regulatory liability 102,844 109,411
Other 201,013 206,064
Total deferred credits and other liabilities 950,310 980,017
Minority interests 109,075 107,815
Cumulative preferred stock 135,328 136,530
COMMON EQUITY:
Common stock, without par value -
129,677,030 shares outstanding 778,273 778,273
Other 245 (3,314)
Retained earnings 540,053 466,279
Total common equity 1,318,571 1,241,238
Total liabilities and capital $5,188,084 $4,827,957
The accompanying notes are an integral part of these financial statements.
- 5 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited - Thousands of $)
NineSix Months
Ended
Sep.June 30,
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 194,698 (113,769)$ (116,281)107,532
Items not requiring cash currently:
Depreciation and amortization 162,879 155,030115,175 108,215
Deferred income taxes - net (11,822) (11,471)
Loss from discontinued operations(7,288) (2,157)
Asset impairment charge (Note 4) 45,000 -
Non-recurring charges (Notes 2 and 3) 35,389 -
22,852
(Gain) loss onLoss (income) from disposal of discon-
tinueddis-
continued operations (Notes 2 and 3)(Note 5) 155,000 (788)
224,342
Cumulative effect of change
in accounting principle - 7,162
Other (17,480) (9,276)(5,530) (24,170)
Change in net current assets (73,790) (118,416)(35,224) 40,018
Other 4,933 (45,059)(40,973) 26,223
Net cash flows from operating activities 258,630 108,883147,780 254,873
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (917) (18,783)(339) (652)
Proceeds from sales of securities 10,040 16,7771,635 7,871
Construction expenditures (291,942) (151,158)(157,273) (199,770)
Investments in unconsolidated
ventures (Note 5)6) (2,125) (74,498) (1,010)
Investment in subsidiary, net of cash
and temporary cash investments
acquired (Note 4) (39,693) -
Proceeds from salesales of investmentinvestments
in affiliate and sale of
leveraged leasesaffiliates (Note 6) 53,384 16,00022,507 33,821
Net cash flows from investing activities (343,626) (138,174)(135,595) (233,228)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of medium-term notes 200,000debt 187,900 150,000
Retirement of bonds (35,268) (20,021)debt (120,913) -
Short-term borrowings 3,927,792 4,753,7625,031,905 756,132
Repayment of short-term borrowings (3,899,417)(4,743,743)(5,070,355) (813,132)
Issuance of preferred stock 7,500 -
Redemption of preferred stock - (1,202) (1,823)
Payment of common dividends (119,628) (100,855)(82,344) (79,752)
Net cash flows from financing activities 72,277 37,320(46,307) 12,046
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (12,719) 8,029(34,122) 33,691
BEGINNING CASH AND TEMPORARY
CASH INVESTMENTS 105,726 111,51291,413 105,604
ENDING CASH AND TEMPORARY
CASH INVESTMENTS $ 93,00757,291 $ 119,541139,295
- 65 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
NineSix Months
Ended
Sep.June 30,
2000 1999 1998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 24,87131,985 $ 38,1379,375
Interest on borrowed money 78,483 70,41452,650 53,857
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.
- 76 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Retained Earnings
(Unaudited - Thousands of $)
Three Months NineSix Months
Ended Ended
Sep.June 30, Sep.June 30,
2000 1999 19982000 1999 1998
Balance at beginning
of period $ 494,059354,944 $ 445,729483,970 $ 466,279366,234 $ 722,584466,279
Net income (loss) 87,166 79,512 194,698 (116,281)(143,651) 49,965 (113,769) 107,532
Cash dividends declared on
common stock ($.3175, $.3075,
$.9325$.6350 and $.93259$.6150 per share) 41,172 39,877 120,924 120,93939,876 82,344 79,752
Balance at end of period $ 540,053170,121 $ 485,364494,059 $ 540,053170,121 $ 485,364494,059
The accompanying notes are an integral part of these financial statements.
- 87 -
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited - Thousands of $)
Three Months NineSix Months
Ended Ended
Sep.June 30, Sep.June 30,
2000 1999 19982000 1999 1998
Net income (loss) $(143,651) $ 87,166 $79,512 $194,698 $(116,281)49,965 $(113,769) $107,532
Unrealized holding gains (losses)
on available-for-sale securities
arising during the period (287) (50) (250) (42)(205) (155) (517) 37
Reclassification adjustment for
realized gains and (losses) on
available-for-sale securities
included in net income (89) 90 (247) 12426 (163) 40 (158)
Other comprehensive income
(loss),loss,
before tax (376) 40 (497) 82(179) (318) (477) (121)
Income tax benefit (expense) related to
items of other comprehensive
income 142 (29) 188 (44)38 110 151 46
Comprehensive income (loss) $(143,792) $ 86,932 $79,523 $194,389 $(116,243)49,757 $(114,095) $107,457
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 Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
OPERATING REVENUES:
Electric $179,752 $190,445 $341,079 $341,286
Gas 29,979 23,652 118,295 99,431
Total operating revenues 209,731 214,097 459,374 440,717
OPERATING EXPENSES:
Fuel for electric generation 38,650 39,380 78,576 71,838
Power purchased 24,346 30,858 46,100 53,884
Gas supply expenses 18,688 13,395 82,082 63,887
Non-recurring charges (Note 3) - - 8,141 -
Other operation expenses 30,547 39,457 67,522 79,649
Maintenance 17,442 20,227 31,323 34,930
Depreciation and amortization 23,901 24,143 48,050 48,285
Federal and state
income taxes 14,397 12,079 24,066 21,634
Property and other taxes 4,475 3,962 9,637 8,998
Total operating expenses 172,446 183,501 395,497 383,105
NET OPERATING INCOME 37,285 30,596 63,877 57,612
Other income 1,850 234 3,369 1,312
Interest charges 11,126 8,790 21,816 17,968
NET INCOME 28,009 22,040 45,430 40,956
Preferred stock dividends 1,317 1,086 2,482 2,176
NET INCOME AVAILABLE
FOR COMMON STOCK $ 26,692 $ 20,954 $ 42,948 $ 38,780
The accompanying notes are an integral part of these financial statements.
- 9 -
Louisville Gas and Electric Company
Statements of Income
(Unaudited)Balance Sheets
(Thousands of $)
Three Months Nine Months
Ended Ended
Sep.ASSETS
(Unaudited)
June 30, Sep. 30,Dec. 31,
2000 1999
1998 1999 1998
OPERATING REVENUES:
Electric $279,907 $212,907 $621,693 $528,341UTILITY PLANT:
At original cost $3,125,138 $3,065,839
Less: reserve for depreciation 1,267,106 1,215,032
Net utility plant 1,858,032 1,850,807
OTHER PROPERTY AND INVESTMENTS -
less reserve 1,161 1,224
CURRENT ASSETS:
Cash and temporary cash investments 39,579 54,761
Marketable securities 5,527 6,936
Accounts receivable - less reserve 107,534 113,859
Materials and supplies - at average cost:
Fuel (predominantly coal) 15,964 17,350
Gas 17,623 16,978 117,054 136,277
Provision for rate
refunds (Note 12) (1,135) - (1,635) -
Total operating revenues 296,395 229,885 737,112 664,618
OPERATING EXPENSES:
Fuel for electric generation 45,361 41,205 117,199 118,488
Power purchased 85,156 18,057 139,040 42,883
Gas supply expenses 8,763 8,950 72,650 89,308stored underground 14,648 38,780
Other operation expenses 39,452 41,976 119,101 122,850
Maintenance 12,800 10,666 47,730 33,985
Depreciation and amortization 24,143 23,294 72,428 69,883
Federal and state
income taxes 25,683 27,403 47,317 53,485
Property34,919 35,010
Prepayments and other taxes 4,001 4,914 12,999 14,3612,996 2,775
Total operating expenses 245,359 176,465 628,464 545,243
NET OPERATING INCOME 51,036 53,420 108,648 119,375
Merger costs to
achieve - - - 34,134current assets 221,167 269,471
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,607 5,607
Regulatory assets 29,999 31,443
Other income 336 359 1,648 10,668
Interest charges 9,668 8,918 27,636 27,629
NET INCOME 41,704 44,861 82,660 68,280
Preferred stock dividends 1,090 1,135 3,266 3,400
NET INCOME AVAILABLE
FOR COMMON STOCK $ 40,614 $ 43,726 $ 79,394 $ 64,88018,682 12,900
Total deferred debits and other assets 54,288 49,950
Total assets $2,134,648 $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 $)
ASSETSCAPITALIZATION AND LIABILITIES
(Unaudited)
Sep.June 30, Dec. 31,
2000 1999
1998
UTILITY PLANT:
At original cost $3,034,699 $2,896,139
Less: reserveCAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Retained earnings 269,179 259,231
Other (1,184) (1,025)
Total common equity 693,165 683,376
Cumulative preferred stock 95,140 95,328
Long-term debt 335,600 380,600
Total capitalization 1,123,905 1,159,304
CURRENT LIABILITIES:
Current portion of long-term debt 271,200 246,200
Notes payable 131,757 120,097
Accounts payable 83,784 113,008
Provision for depreciation 1,211,971 1,144,123
Net utility plant 1,822,728 1,752,016rate refunds - 8,962
Dividends declared 17,817 24,236
Accrued taxes 39,632 23,759
Accrued interest 6,798 9,265
Other 16,830 15,725
Total current liabilities 567,818 561,252
DEFERRED CREDITS AND OTHER PROPERTY AND INVESTMENTS -
less reserve 1,348 1,154
CURRENT ASSETS:
CashLIABILITIES:
Accumulated deferred income
taxes 261,967 255,910
Investment tax credit, in
process of amortization 65,111 67,253
Accumulated provision for pensions
and temporary cash investments 16,572 31,730
Marketable securities 8,274 17,851
Accounts receivable - less reserve 191,017 142,580
Materials and supplies - at average cost:
Fuel (predominantly coal) 12,142 23,993
Gas stored underground 41,778 33,485related benefits 39,454 38,431
Customer advances for construction 9,965 11,104
Regulatory liability 55,080 58,726
Other 34,586 33,103
Prepayments11,348 19,472
Total deferred credits and other 1,748 2,285liabilities 442,925 450,896
Total current assets 306,117 285,027
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,685 5,919
Regulatory assets 34,117 37,643
Other 15,217 22,878
Total deferred debitscapital and other assets 55,019 66,440
Total assets $2,185,212 $2,104,637liabilities $2,134,648 $2,171,452
The accompanying notes are an integral part of these financial statements.
- 11 -
Louisville Gas and Electric Company
Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
Sep. 30, Dec. 31,
1999 1998
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Retained earnings 259,856 247,462
Other (960) (786)
Total common equity 684,066 671,846
Cumulative preferred stock 95,328 95,328
Long-term debt 626,800 626,800
Total capitalization 1,406,194 1,393,974
CURRENT LIABILITIES:
Accounts payable 218,056 133,673
Provision for rate refunds 11,126 13,261
Dividends declared 24,090 23,168
Accrued taxes 37,370 31,929
Accrued interest 7,786 8,038
Other 15,978 15,242
Total current liabilities 314,406 225,311
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 252,021 254,589
Investment tax credit, in
process of amortization 68,325 71,542
Accumulated provision for pensions
and related benefits 45,860 59,529
Regulatory liability 60,998 63,529
Other 37,408 36,163
Total deferred credits and other liabilities 464,612 485,352
Total capital and liabilities $2,185,212 $2,104,637
The accompanying notes are an integral part of these financial statements.
- 12 -
Louisville Gas and Electric Company
Statements of Cash Flows
(Unaudited - Thousands of $)
NineSix Months
Ended
Sep.June 30,
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 82,66045,430 $ 68,28040,956
Items not requiring cash currently:
Depreciation and amortization 72,428 69,88348,050 48,285
Deferred income taxes - net (4,981) 373246 (3,982)
Investment tax credit - net (3,217) (3,180)(2,142) (2,145)
Other 5,255 2,8624,264 3,585
Changes in current assets and liabilities 42,348 (22,279)8,036 10,050
Other (7,663) 24,132(4,508) 6,319
Net cash flows from operating activities 186,830 140,07199,376 103,068
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (668) (17,784)(194) (495)
Proceeds from sales of securities 9,955 15,6231,520 7,861
Construction expenditures (141,932) (72,950)(64,560) (59,757)
Net cash flows from investing activities (132,645) (75,111)(63,234) (52,391)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of pollution control bonds 25,000 -
Retirement of first mortgage and
pollution control bonds (46,083) -
(20,000)Short-term borrowings 1,432,256 -
Repayment of short-term borrowings (1,420,596) -
Payment of dividends (69,343) (64,417)(41,901) (46,257)
Net cash flows from financing activities (69,343) (84,417)(51,324) (46,257)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (15,158) (19,457)(15,182) 4,420
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 54,761 31,730 50,472
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 16,57239,579 $ 31,01536,150
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 53,3264,396 $ 37,39616,065
Interest on borrowed money 25,497 26,19517,876 16,657
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.
- 1312 -
Louisville Gas and Electric Company
Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months NineSix Months
Ended Ended
Sep.June 30, Sep.June 30,
2000 1999 19982000 1999 1998
Balance at beginning
of period $242,242 $239,064$258,987 $243,288 $259,231 $247,462 $258,910
Net income 41,704 44,861 82,660 68,28028,009 22,040 45,430 40,956
Subtotal 283,946 283,925 330,122 327,190286,996 265,328 304,661 288,418
Cash dividends declared on stock:
Preferred 1,090 1,135 3,266 3,4005% cumulative preferred 269 269 538 538
Auction rate cumulative
preferred 681 450 1,210 904
$5.875 cumulative preferred 367 367 734 734
Common 23,00016,500 22,000 67,000 63,00033,000 44,000
Subtotal 24,090 23,135 70,266 66,40017,817 23,086 35,482 46,176
Balance at end of period $259,856 $260,790 $259,856 $260,790$269,179 $242,242 $269,179 $242,242
The accompanying notes are an integral part of these financial statements.
- 1413 -
Louisville Gas and Electric Company
Statements of Comprehensive Income
(Unaudited - Thousands of $)
Three Months NineSix Months
Ended Ended
Sep.June 30, Sep.June 30,
2000 1999 19982000 1999 1998
Net income available
for common stock $40,614 $43,726 $79,394 $64,880$26,692 $20,954 $42,948 $38,780
Unrealized holding (losses) gainslosses on
available-for-sale securities
arising during the period (199) 32 (293) 39(107) (178) (266) (94)
Income tax benefit (expense) related
to unrealized holding
gains and losses 80 (14) 118 (16)43 72 107 38
Comprehensive income $40,495 $43,744 $79,219 $64,903$26,628 $20,848 $42,789 $38,724
The accompanying notes are an integral part of these financial statements.
- 14 -
Kentucky Utilities Company
Statements of Income
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
OPERATING REVENUES $205,324 $225,794 $423,102 $443,143
OPERATING EXPENSES:
Fuel for electric generation 51,466 49,412 107,081 107,567
Power purchased 43,464 51,606 82,308 90,923
Non-recurring charges (Note 3) - - 11,030 -
Other operation expenses 24,167 31,812 53,015 58,955
Maintenance 17,078 15,944 31,228 28,464
Depreciation and amortization 24,493 22,158 48,825 44,149
Federal and state
income taxes 11,368 16,077 22,734 33,221
Property and other taxes 4,376 3,788 9,216 7,901
Total operating expenses 176,412 190,797 365,437 371,180
NET OPERATING INCOME 28,912 34,997 57,665 71,963
Other income 2,654 1,993 3,979 4,162
Interest charges 10,034 9,233 19,938 18,740
NET INCOME 21,532 27,757 41,706 57,385
Preferred stock dividends 564 564 1,128 1,128
NET INCOME AVAILABLE
FOR COMMON STOCK $ 20,968 $ 27,193 $ 40,578 $ 56,257
The accompanying notes are an integral part of these financial statements.
- 15 -
Kentucky Utilities Company
Statements of Income
(Unaudited)Balance Sheets
(Thousands of $)
Three Months Nine Months
Ended Ended
Sep.ASSETS
(Unaudited)
June 30, Sep. 30,Dec. 31,
2000 1999
1998 1999 1998
OPERATING REVENUES:
Electric $287,703 $246,117 $730,846 $622,415
ProvisionUTILITY PLANT:
At original cost $2,896,405 $2,851,066
Less: reserve for rate refunds
(Note 12) (6,200)depreciation 1,336,228 1,288,819
Net utility plant 1,560,177 1,562,247
OTHER PROPERTY AND INVESTMENTS -
(6,200)less reserve 14,688 14,349
CURRENT ASSETS:
Cash and temporary cash investments 484 6,793
Accounts receivable - Net operating revenues 281,503 246,117 724,646 622,415
OPERATING EXPENSES:less reserve 96,165 88,549
Materials and supplies - at average cost:
Fuel for electric generation 60,770 65,586 168,338 168,623
Power purchased 104,213 40,134 195,136 82,725(predominantly coal) 27,980 30,225
Other operation expenses 30,403 31,100 89,359 92,531
Maintenance 13,649 15,630 42,113 45,578
Depreciation and amortization 22,546 21,749 66,694 64,852
Federal and state
income taxes 13,910 23,325 47,130 50,024
Property28,015 26,213
Prepayments and other taxes 3,483 3,916 11,384 12,2253,106 3,743
Total operating expenses 248,974 201,440 620,154 516,558
NET OPERATING INCOME 32,529 44,677 104,492 105,857
Merger costs to
achieve - - - 21,830current assets 155,750 155,523
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4,665 4,827
Regulatory assets 20,787 23,033
Other income 1,604 1,899 5,767 5,806
Interest charges 9,707 9,596 28,448 28,923
NET INCOME 24,426 36,980 81,811 60,910
Preferred stock dividends 564 564 1,692 1,692
NET INCOME AVAILABLE
FOR COMMON STOCK $ 23,862 $ 36,416 $ 80,119 $ 59,21826,118 25,111
Total deferred debits and other assets 51,570 52,971
Total assets $1,782,185 $1,785,090
The accompanying notes are an integral part of these financial statements.
- 16 -
Kentucky Utilities Company
Balance Sheets (cont.)
(Thousands of $)
ASSETSCAPITALIZATION AND LIABILITIES
(Unaudited)
Sep.June 30, Dec. 31,
2000 1999
1998
UTILITY PLANT:
At original cost $2,816,749 $2,685,528
Less: reserveCAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Retained earnings 320,048 329,470
Other (595) (595)
Total common equity 627,593 637,015
Cumulative preferred stock 40,000 40,000
Long-term debt 430,830 430,830
Total capitalization 1,098,423 1,107,845
CURRENT LIABILITIES:
Current portion of long-term debt 54,000 115,500
Notes payable 29,931 -
Accounts payable 144,792 116,546
Provision for depreciation 1,266,895 1,208,183
Net utility plant 1,549,854 1,477,345
OTHER PROPERTY AND INVESTMENTS -
less reserve 14,165 14,238
CURRENT ASSETS:
Cash and temporary cash investments 37,129 59,071
Accounts receivable - less reserve 135,287 106,003
Materials and supplies - at average cost:
Fuel (predominantly coal) 29,246 23,927rate refunds 7,981 20,567
Dividends declared 25,188 19,150
Accrued taxes 34,319 10,502
Accrued interest 7,127 7,329
Other 25,461 24,877
Prepayments 2,595 2,42718,285 18,617
Total current assets 229,718 216,305liabilities 321,623 308,211
DEFERRED DEBITSCREDITS AND OTHER ASSETS:
Unamortized debt expense 4,927 5,227LIABILITIES:
Accumulated deferred income
taxes 239,461 243,620
Investment tax credit, in
process of amortization 16,738 18,575
Accumulated provision for pensions
and related benefits 48,369 48,285
Regulatory assets 24,393 28,228liability 41,161 46,069
Other 22,871 19,85916,410 12,485
Total deferred debitscredits and other assets 52,191 53,314liabilities 362,139 369,034
Total assets $1,845,928 $1,761,202capital and liabilities $1,782,185 $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)
Sep. 30, Dec. 31,
1999 1998
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Retained earnings 324,286 299,168
Other (595) (595)
Total common equity 631,831 606,713
Cumulative preferred stock 40,000 40,000
Long-term debt 484,830 546,330
Total capitalization 1,156,661 1,193,043
CURRENT LIABILITIES:
Long-term debt due within one year 61,500 -
Accounts payable 148,093 100,012
Provision for rate refunds 27,700 21,500
Dividends declared 19,282 18,188
Accrued taxes 25,107 16,733
Accrued interest 9,714 8,110
Other 33,945 31,226
Total current liabilities 325,341 195,769
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 239,351 244,493
Investment tax credit, in
process of amortization 19,519 22,302
Accumulated provision for pensions
and related benefits 55,165 50,044
Regulatory liability 41,846 45,882
Other 8,045 9,669
Total deferred credits and other liabilities 363,926 372,390
Total capital and liabilities $1,845,928 $1,761,202
The accompanying notes are an integral part of these financial statements.
- 18 -
Kentucky Utilities Company
Statements of Cash Flows
(Unaudited - Thousands of $)
NineSix Months
Ended
Sep.June 30,
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 81,81141,706 $ 60,91057,385
Items not requiring cash currently:
Depreciation and amortization 66,694 64,85248,825 44,149
Deferred income taxes - net (9,178) (331)(7,478) (2,214)
Investment tax credit - net (2,783) (2,875)(1,837) (1,839)
Changes in current assets and liabilities 31,623 49,42638,445 (23,820)
Other 11,116 3,149(1,049) 7,658
Net cash flows from operating activities 179,283 175,131118,612 81,319
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (145,628) (53,498)(48,403) (44,282)
Net cash flows from investing activities (145,628) (53,498)(48,403) (44,282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings 69,773 -
381,500
RepaymentsRepayment of short-term borrowings (39,842) -
(415,100)Issuance of pollution control bonds 12,900 -
Retirement of pollution control bonds (74,785) -
Payment of dividends (55,597) (41,783)(44,564) (37,128)
Net cash flows from financing activities (55,597) (75,383)(76,518) (37,128)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (21,942) 46,250(6,309) (91)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 6,793 59,071 5,453
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 37,129484 $ 51,70358,980
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 53,77819,949 $ 43,55630,273
Interest on borrowed money 24,078 24,24418,654 17,632
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these financial statements.
- 1918 -
Kentucky Utilities Company
Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months NineSix Months
Ended Ended
Sep.June 30, Sep.June 30,
2000 1999 19982000 1999 1998
Balance at beginning
of period $319,424 $287,461$324,080 $310,231 $329,470 $299,167 $304,750
Net income 24,426 36,980 81,811 60,91021,532 27,757 41,706 57,385
Subtotal 343,850 324,441 380,978 365,660345,612 337,988 371,176 356,552
Cash dividends declared on stock:
Preferred 564 564 1,692 1,6924 75% preferred 237 237 475 475
6.53% preferred 327 327 653 653
Common 19,00025,000 18,000 55,000 58,09150,000 36,000
Subtotal 19,56425,564 18,564 56,692 59,78351,128 37,128
Balance at end of period $324,286 $305,877 $324,286 $305,877$320,048 $319,424 $320,048 $319,424
The accompanying notes are an integral part of these financial statements.
- 2019 -
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 the "Company." All significant intercompany items and transactions
have been eliminated from the unaudited consolidated financial
statements.subsidiaries. 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 included herein are adequate to make the information presented not
misleading.
See the Company's, LG&E's and KU's Reports on Form 10-K for 19981999 for
information relevant to the accompanying financial statements,
including information as to the significant accounting policies of the
Company.
2. 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. Pursuant to the acquisition agreement, among other
things, LG&E Energy will become a wholly owned subsidiary of Powergen
and its U.S. headquarters. The Utility Operations of the Company will
continue their separate identities and serve customers in Kentucky and
Virginia under their present names. The preferred stock and debt
securities of the Utility 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 the conditions to consummation
of the acquisition are met. It is possible that the remaining
regulatory approvals may be received in time to permit a closing during
the fourth quarter of 2000. Those conditions include, without
limitation, the approval of the holders of a majority of the
outstanding shares of common stock of each 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 (HSR Act),
and with the Committee on Foreign Investment in the United States under
the Exon-Florio Provisions of the Omnibus Trade and Competitiveness Act
of 1988 (E-F Act) and the expiration of all applicable waiting periods
thereunder. The Company expensed approximately $14.7 million and $15.4
million related to the Powergen transaction during the three- and six-
month periods ended June 30, 2000, respectively. The foregoing
description of the acquisition does not purport to be complete and is
qualified in its entirety by reference to LG&E Energy's current reports
on Form 8-K, filed February 29, 2000, with the SEC.
Through mid-August 2000, a number of approval steps have been completed
by the Company and Powergen. Shareholders of the Company and of
Powergen approved the merger transaction in separate meetings held in
June 2000. Further, approvals were received from the Kentucky
Commission in May 2000, the FERC in June 2000 and the Virginia
Commission in July 2000. The parties submitted the requisite filings
under the HSR Act and the E-F Act in late July and early August 2000,
respectively, which trigger 30 day waiting periods due to expire in
late August and early September, respectively, absent any further
inquiry or investigation by the applicable regulatory authority.
- 20 -
The parties' joint application for approval to the SEC under PUHCA was
submitted in April 2000. While the Company and Powergen believe that
they will receive the 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.
3. During the first quarter 2000, the Company took a $12.1 million ($.09)
after-tax charge for the continued "One Utility" integration of the
operations of LG&E and KU including their customer service centers and
certain administrative elements of their retail electric and gas
distribution operations. The result of this consolidation was the
elimination of approximately 400 positions most of which were taken by
employees through the Company's voluntary enhanced severance program.
4. The Company previously announced its intention to sell its natural
gas gathering and processing business in the near term. Information
gathered to date indicates that the Company will realize proceeds from
the sale of this business below carrying value. As a result, the
Company recorded a pretax impairment charge of $45 million in the
second quarter of 2000 to reduce the carrying value of this business to
more appropriately reflect net realizable value.
5. Effective June 30, 1998, the Company discontinued its merchant energy
trading and sales business. This business consisted primarily of a
portfolio of energy marketing contracts entered into in 1996 and early
1997, nationwide deal origination and some level of speculative trading
activities, which were not directly supported by the Company's physical
assets. The Company's decision to discontinue these operations was
primarily based on the impact that volatility and rising prices in the
power market had on its portfolio of energy marketing contracts.
Exiting the merchant energy trading and sales business 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. If the Company is
unable to dispose of these commitments or assets it will continue to
meet its obligations to buy and sell natural gas and electric power
under the contracts.terms of the contracts until disposition or expiration. The
Company, however, has maintained sufficient market knowledge, risk
management skills, technical systems and experienced personnel to
maximize the value of - 21 -
power sales from physical assets it owns or
controls, including LG&E, KU and Western Kentucky Energy Corp. (WKE).
At the time the Company decided to discontinue its merchant energy
trading and sales business, it also decided to sell its natural gas
gathering and processing business. Subsequently, effective June 30,
1999, the Company decided to retain this business. The accompanying
financial statements reflect the reclassification of the natural gas
gathering and processing business as continuing operations for all
periods presented. See Note 3 below.WKE.
As a result of the Company's decision to discontinue its merchant
energy trading and sales activity, and the initial decision to sell the
associated gas gathering and processing business, the Company recorded
an after-tax loss on disposal of discontinued operations of $225
million in the second quarter of 1998. The loss on disposal of
discontinued operations resulted primarily from several fixed-price
energy marketing contracts entered into in 1996 and early 1997,
including the Company's long-term contract with 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.
- 21 -
In the second quarter of 2000, the Company increased its after-tax
accrued loss on disposal of discontinued operations by an additional
$155 million primarily to reflect the most recent OPC load forecast,
coupled with the increased demand experienced this summer, and new
price forecasts for the OPC and other long-term contracts. Although
the Company used what it believedbelieves to be appropriate estimates for
future energy prices, among other factors, to calculate the net
realizable value of discontinued operations, there are inherent
limitations in models to accurately predict future commodity prices,
load demands and other events.events that could impact the amounts recorded by
the Company.
Operating results for the discontinued operationsmerchant energy trading and
sales business follow. All amounts
exclude the Company's natural gas gathering and processing business.
The Company charged its loss from discontinued operations for the three-
and nine-month periods ended September 30, 1999, to accrued loss on
disposal of discontinued operations.
Three Months NineSix Months
Ended Ended
Sep.June 30, Sep.June 30,
2000 1999 19982000 1999
1998
Revenues $ 386,038 $1,870,301 $ 675,820 $3,466,093$106,878 $156,345 $181,576 $289,782
Loss before taxes (148,464) (76,367) (175,187) (114,227)
Loss(32,944) (25,468) (43,559) (37,544)
Income (loss) from
discontinued operations,oper-
ations, net of incomein-
come taxes (88,514) (38,911) (104,505) (61,763)
- 22 -
(20,469) (16,692) (27,063) (20,480)
Net assets of discontinued operations at SeptemberJune 30, 1999,2000, follow.
All amounts exclude the Company's natural gas gathering and processing
business.
Accounts receivable $ 69,29044,249
Price risk management assets 33,38428,346
Accounts payable (83,390)
Price risk management
liabilities (10,499)(77,633)
Other assets and liab-
ilities, net 26,30616,070
Net assets before balance
of reserve for discontinued
operations 35,091
Reserve for11,032
Accrued loss on disposal
of discontinued operations,
(4,950)
Incomenet of income tax benefit
6,239of $184,647 (302,937)
Net assetsliabilities of discon-
tinued operations $ 36,380$(291,905)
Total pretax charges against the accrued loss on disposal of
discontinued operations through SeptemberJune 30, 1999,2000, include $250.8$288.6 million
for commitments prior to disposal, $69.6 million for transaction
settlements, $11.1 million for goodwill, and $25.9$36.5 million for other
exit costs. While the Company has been successful in settling portions
of its discontinued operations, significant assets, operations and
obligations remain. The Company continues to manage the remaining
portfolio and believes it has successfully hedged certain of its future exposures, and
has initiated arbitration proceedings with OPC over the terms of its
contract.
As discussed in Part II, Item 1, Legal Proceedings below, LG&E Energy
Marketing Inc. initiated arbitration proceedings against OPC related to
LEM's long-term contract to supply approximately one-half of OPC's
systemwide power needs. While the Company expects a favorable outcome
in the OPC arbitration proceeding, no assurances can be given as to
such an event. Should OPC prevail, the Company may be required to
increase its after-tax accrued loss on disposal of discontinued
operations by approximately $150 million as a result of higher than
anticipated future commodity prices, increased load demands, and other
factors. Any such increase in the loss reserve will be recorded in
discontinued operations. This amount is subject to continuing analysis
and estimation. Management does not expect this to have a material
effect on income from continuing operations. See Part II, Item 1,
Legal Proceedings below.
If the Company is unable to dispose of its remaining commitments, it
will continue to meet its obligations
through various power purchase commitments and planned construction of
physical assets. Management cannot predict the termsultimate effectiveness
of the
contracts.these hedges.
The pretax net fair value of thesethe remaining commitments as of SeptemberJune 30,
1999,2000, are currently estimated to be approximately $7$112 million favorable
for the remainder of 1999, offset by negative $5in 2000,
$61 million to $27$98 million each year in 20002001 through 2004 and $9$17
million in the aggregate thereafter.
- 22 -
As of SeptemberJune 30, 1999,2000, the Company's discontinued operations were under
various contracts to buy and sell power and gas with net notional
amounts of 23.824.4 million MWh'sMwh's of power and 38.524.9 million MMBTU'sMmbtu's of
natural gas with a volumetric weighted-average period of approximately
3934 and 5038 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
- 23 -
risk management commitments, but do not reflect actual amounts of
cash, financial instruments, or quantities of the underlying commodity
which may ultimately be exchanged between the parties.
As of October 19, 1999,July 27, 2000, the Company estimates that a $1 change in
electricity prices and a 10 cent10-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$10.8 million.
In addition to price risk, the value of the Company's remaining energy
portfolio is subject to operational and event risks including, among
others, increases in load demand, regulatory changes, and forced
outages at units providing supply for the Company. As of October 19,
1999,July 27,
2000, the Company estimates that a 1% change in the forecasted load
demand could change the value of the Company's remaining energy
portfolio by $9.6$11.7 million.
The Company's discontinued operations maintain policies intended to
minimize credit risk and revalue credit exposures daily to monitor
compliance with those policies. As of SeptemberJune 30, 1999,2000, over 95%94% of the
Company's price risk management commitments were with counterparties
rated BBB equivalent or better. As of SeptemberJune 30, 1999, seven2000, six
counterparties represented 80%76% of the Company's price risk management
commitments.
3. Effective June 30, 1999, the Company reclassified its natural gas
gathering and processing business to continuing operations from
discontinued operations. The Company chose to retain rather than
dispose of this business at the end of the one-year period established
by accounting standards because of management's expectation of more
favorable future energy prices and the related impact on this business.
The Company has reflected the operating results and net assets of the
natural gas gathering and processing business as continuing operations
in the accompanying financial statements for all periods presented.
Operating results for the natural gas gathering and processing business
follow.
Year Ended December 31,
1998 1997 1996
Revenues $109,833 $107,691 $85,259
(Loss) income before taxes (2,593) 2,829 4,888
Net (loss) income (1,599) 1,323 2,873
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
Revenues $40,229 $25,321 $115,666 $86,212
(Loss) income before taxes (321) (901) (1,171) (1,547)
Net (loss) income (312) (658) (1,060) (1,405)
- 24 -
Net assets of the natural gas gathering and processing business follow.
Sep. 30, Dec. 31, Dec. 31,
1999 1998 1997
Cash and temporary cash
investments $ 6,440 $ - $ 509
Accounts receivable 20,303 7,425 13,948
Non-utility property and
plant, net 157,539 161,473 171,114
Accounts payable (20,819) (6,148) (13,449)
Goodwill and other assets
and liabilities, net (6,553) (22,318) (20,043)
Net assets $156,910 $140,432 $152,079
The Company recorded an after-tax loss on disposal of discontinued
operations of $225 million in the second quarter of 1998. No loss on
disposal of the net assets of the natural gas gathering and processing
business was included because the Company assumed it would sell these
assets for an amount equal to or greater than book value. It also
included an after-tax reserve of approximately $1.6 million for
estimated losses from operations of the natural gas gathering and
processing business through the date of disposal. Since this amount
equaled the estimated losses from operations included in the original
accrued loss on disposal of discontinued operations, no reversal of the
accrued loss was included in income for the three- and nine-month
periods ended September 30, 1999. The Company has recorded no
impairment losses related to the net assets of its natural gas
gathering and processing business.
4. In July 1999, the Company purchased 100% of the outstanding common
stock of CRC-Evans Pipeline International, Inc. and affiliates (CRC)
for initial consideration of $45.6 million and retirement of
approximately $37.9 million in CRC debt. CRC, based in Houston, Texas,
is a provider of specialized equipment and services used in the
construction and rehabilitation of gas and oil transmission pipelines.
The purchase agreement provides for future annual earn-out payments to
the previous owners based on CRC's meeting certain financial targets
over the next three years. The agreement caps the total of these
payments at $31.0 million.
The purchase consideration, including the potential earn-out payments,
was paid 55% in cash and 45% in LG&E Energy common stock. LG&E Energy
will repurchase common stock from time to time in the open market or
through privately negotiated transactions in amounts equal to the stock
portions of the initial and subsequent earn-out payments. During the
third quarter 1999, the Company purchased approximately 935,000 shares
in this regard and completed the initial purchase installment.
The Company accounted for the acquisition using the purchase method.
Management recorded goodwill of approximately $51.1 million from the
initial transaction and may record additional goodwill contingent upon
future earn-out payments. Goodwill is being amortized over a period of
twenty years.
- 25 -
The fair values of the net assets acquired follow:
Assets $132,501
Liabilities 87,956
Cash paid, excluding transaction costs 44,545
Cash and cash equivalents acquired 5,943
Net cash paid, excluding transaction costs 38,602
Transaction costs 1,091
Net cash paid $ 39,693
5. On March 30, 1999, the Company acquired an indirect 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. The purchase price totaled
$73.5 million, which has been reflected in investments in
unconsolidated ventures in the accompanying balance sheet. The Company
accounted for the acquisition using the purchase method, and it records
its share of earnings using the equity method. The purchase price
exceeded the underlying equity in BAN by $13.0 million. The Company
allocated this difference to the assets and liabilities acquired based
on their estimated fair values.
6. In March 1999, LG&E-Westmoreland Rensselaer,2000, the Company sold its interest in CEC-APL L.P., a California general
partnership in which the Company ownsowned a 50%49% 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 offor
approximately $34$18 million. TheThis sale resulted in an after-
taxa pretax gain toof
approximately $2 million. In June 2000, the Company sold its interest
in KUCC Cleburne Corporation, through which the Company owned a
minority interest in one of the Tenaska limited partnerships, for $4.6
million. This sale resulted in a pretax gain of approximately $8.9$1.3
million.
7. The Company adopted Emerging Issues Task Force Issue No. 98-10,
AccountingIn March 2000, the 2000 Kentucky General Assembly passed House Bill 897
that established requirements for Energy Tradingcost allocations, affiliate
transactions and Riska code of conduct governing the relationship between
utilities and their non-utility operations and affiliates. 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
tradingdoes not expect this matter to include certain financial activities related to physical
assets which were not previously marked to market by established
industry practice. Initial adoption of EITF No. 98-10 did not have a material impactadverse effect on the
Company's consolidatedfinancial position or results of operations or
financial position. Foroperations.
In March 2000, LG&E filed a Notice and Statement with the three-Kentucky
Commission requesting an adjustment in LG&E's gas rates. LG&E asked
for a general adjustment in gas rates for a test year for the twelve
months ended December 31, 1999. The revenue increase applied for was
$26.4 million. The Commission subsequently suspended the effective
date of the proposed new tariffs, and nine- month periods endedheld hearings August 2, 2000,
through August 4, 2000. Under Kentucky law the Commission must issue a
decision on LG&E's application no later than September 30,28, 2000.
In May 2000, the Court upheld the Commission's February 1999 order that
LG&E make FAC refunds, but reversed the Company recorded approximately $6.2Commission's determination that
it was not appropriate to require LG&E to pay interest on the amounts
to be refunded. The Court remanded the case to the Commission for a
determination of whether interest should be awarded to compensate
ratepayers for LG&E's use of the money to be refunded. On June 2,
2000, LG&E filed a Notice of Appeal to the Kentucky Court of Appeals
from the Franklin Circuit Court decision.
- 23 -
In June 2000, the Commission acknowledged that the PBR Order issued in
January 2000 contained errors and issued its Orders on rehearing which
revised the rate reductions it had previously ordered. LG&E's rate
reduction was lowered to $26.3 million, of
expense and $.8 million of income, respectively, in consolidated pre-
tax income as a result of valuingKU's reduction was lowered
to $30.4 million. No parties filed appeals from the Company's electric energy trading
contracts usingCommission's
orders within the mark-to-market method.time allowed by statute.
8. In April 1999,May 2000, LG&E and KU filed a joint agreement amongissued new variable-rate pollution-control
bonds for $25 million and $12.9 million, respectively. At June 30,
2000, the companiesinterest rates paid on the bonds equaled 4.40% for LG&E and
the Kentucky Attorney General to amend the companies' previously-
filed performance-based ratemaking (PBR) plan.4.45% for KU. The amendment requested
Kentucky Public Service Commission (the Commission) approval of a five-
year rate reduction plan, which would reduce electric rates by $20
million in the first year (beginning July 1999),new bonds replaced LG&E's 7.45% Series P bonds and
by $8 million
annually for each of the next four years (through June 2004), for a
total five-year savings to customers of $52 million. The reductions
will be distributed betweenKU's 7.375% Series 7 and 7.60% Series 7 bonds. LG&E and KU customers based oncalled the
same
methodology the Commission approvedold bonds 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.June 2000.
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 2004) both the rate cap and the merger-savings surcredit
the utilities established as part of their
- 26 -
earlier merger plan. Under the rate cap, the companies agreed, in the
absence of extraordinary circumstances, not to increase 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 2004).
In April 1999, the Commission issued initial orders implementing the
amended PBR plan, effective July 1999, and subject to modification.
The Commission also consolidated into the continuing PBR proceedings an
earlier March 1999, rate complaint by a group of industrial
intervenors, the Kentucky Industrial Utility Consumers, Inc. (KIUC) in
which KIUC requested significant reductions in electric rates.
Hearings were conducted before the Commission on LG&E's and KU's
amended PBR plans and the KIUC rate reduction petitions in August and
September 1999. Legal briefs of the parties were filed with the
Commission in October 1999. KIUC's current position calls for annual
revenue reductions for LG&E and KU of $69.6 million and $61.5 million,
respectively. A decision from the Commission is expected by the end of
the fourth quarter of 1999 or in early 2000.
9. In September 1999,2000, Capital Corp. issued $50$150 million of floating ratefloating-rate medium-
term notes under its medium-term note program.due June 2001. The notes mature inbear an interest rate of 7.4925%
through September 18, 2000, and pay interest at a rate equal to the one-monththree-month LIBOR
plus 0.10%.70 basis points thereafter.
In May 1999, Capital Corp.August 2000, LG&E issued $150.0$83.3 million of medium-term notes
due May 2004, with a statedvariable-rate pollution-
control bonds. At August 9, 2000, the interest raterates paid on the notes of 6.205%.
After taking into account the forward-starting interest-rate swap
entered into in April 1999, to hedge the entire issuance, the effective
rate amounted to 6.13%bonds
equaled 4.40%. The proceeds were used to repay a portion of
Capital Corp.'s outstanding commercial paper, which had been used to
fundnew bonds replaced LG&E's 7.625% Series Q bonds.
LG&E fully defeased the BAN acquisition and other working capital needs.
In May 1999, KU entered into an interest-rate swap agreement to hedge a
portion of its outstanding first mortgage bonds. The swap has a
notional amount of $53 million and expires in May 2004. KU pays a
variable rate basedSeries Q bonds on the six-month London Interbank Offered Rate
(LIBOR) plus 1.88% and receives a fixed rate of 7.92%. The agreement
provides for a collar on the variable rate paid by KU with a floor of
4.65% and a cap of 6.78%. The agreement suspends the collar during
periods when the London Interbank Offered Rate moves outside a
specified range. As of September 30, 1999, the rate payable by KU
equaled 5.18%.
- 27 -
10.External and intersegment revenues and income from continuing
operations by business segment for the three months ended September 30,
1999, follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $273,836 $ 4,936 $ 39,771
LG&E gas 17,623 - 843
KU electric 276,540 4,963 23,862
Independent Power
Operations 5,366 - 5,573
Western Kentucky
Energy 144,434 - 12,377
Argentine Gas
Distribution 48,479 - 6,632
Other Capital Corp. 99,112 - 1,754
All Other - (9,899) (3,646)
Consolidated $865,390 $ - $ 87,166
External and intersegment revenues and income from continuing
operations by business segment for the nine months ended September 30,
1999, follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $ 607,681 $ 12,377 $ 78,124
LG&E gas 117,054 - 1,270
KU electric 710,626 14,020 80,119
Independent Power
Operations 18,467 - 26,850
Western Kentucky
Energy 273,462 - 10,889
Argentine Gas
Distribution 123,422 - 11,785
Other Capital Corp. 237,600 - (3,842)
All Other - (26,397) (11,285)
Consolidated $2,088,312 $ - $193,910
- 28 -
August 9, 2000.
9. External and intersegment revenues and income from continuing
operations by business segment for the three months ended SeptemberJune 30,
1998,2000, follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $209,431$175,420 $ 3,4754,333 $ 41,93526,773
LG&E gas 16,97829,979 - 1,790(80)
KU electric 238,365 7,752 36,416201,186 4,139 20,968
Independent Power
Operations 5,1085,938 - 1,8128,037
Western Kentucky
Energy 66,24666,975 - 5,4513,002
Argentine Gas
Distribution 47,39949,017 - 3,4066,723
Other Capital Corp. 45,64977,776 - (2,645)(37,073)
All Other - (11,227) (9,311)(8,472) (17,001)
Consolidated $629,176$606,291 $ - $ 78,85411,349
- 24 -
External and intersegment revenues and income from continuing
operations by business segment for the ninesix months ended SeptemberJune 30, 1998,2000,
follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $ 520,539330,539 $ 7,80110,540 $ 62,43443,078
LG&E gas 136,277118,295 - 2,446(129)
KU electric 609,523 12,892 59,218411,957 11,146 40,578
Independent Power
Operations 15,00110,614 - 30,96214,864
Western Kentucky
Energy 66,246127,729 - 5,4512,501
Argentine Gas
Distribution 118,05179,759 - 6,1155,992
Other Capital Corp. 116,291152,788 - (5,257)(47,063)
All Other - (20,693) (23,294)(21,686) (18,590)
Consolidated $1,581,928$1,231,681 $ - $138,075
The assets of$ 41,231
External and intersegment revenues and income from continuing
operations by business segment for the Company'sthree months ended June 30,
1999, follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $185,519 $ 4,927 $ 20,740
LG&E gas 23,652 - 213
KU electric 220,739 5,055 27,193
Independent Power
Operations 6,197 - 7,097
Western Kentucky
Energy 69,050 - (464)
Argentine Gas
Distribution segment
increased from $346.3 million at December 31, 1998, to $441.9 million
at September 30, 1999, due mainly to acquiring a 19.6% ownership
interest in BAN (see Note 5 of Notes to Financial Statements) and to
construction expenditures at Distribuidora de Gas del Centro. The
assets of the45,146 - 4,796
Other Capital Corp. 73,354 - (6,484)
All Other - (9,982) (3,126)
Consolidated $623,657 $ - $ 49,965
- 25 -
External and intersegment revenues and income from continuing
operations by business segment increased from $121.0 million
at December 31, 1998, to $439.8 million atfor the six months ended June 30, 1999. This
increase resulted1999,
follow:
Income
(Loss)
Inter- from
reclassifying the assets of the naturalExternal segment Cont.
Revenues Revenues Oper.
LG&E electric $ 333,845 $ 7,441 $ 38,353
LG&E gas gathering and processing business from discontinued to continuing
operations (see Note 3 of Notes to Financial Statements) and acquiring
CRC-Evans in July 1999 (see Note 4 of Notes to Financial Statements).
A decrease resulting from transferring costs related to gas turbine
peaking units to LG&E and99,431 - 427
KU electric 434,086 9,057 56,257
Independent Power
Operations 13,101 - 2921,277
Western Kentucky
Energy 129,028 -
partially offset these increases (see Management's Discussion and
Analysis of Results of Operations and Financial Condition in Item 2).
11.In August 1999, a(1,488)
Argentine Gas
Distribution 74,943 - 5,153
Other Capital Corp. subsidiary entered into an operating
lease for three combustion turbines. The lease has a five year term,
but no rent is payable until the turbines have been completed and
installed. Certain related facilities are expected to be added to the
same lease in the fourth quarter of 1999. The turbines are expected to
be used in a 450 Mw gas fired merchant combustion turbine power
generation facility, located in Monroe, Georgia, which is expected to
be completed in June 2001. At the end of the lease term, the Company
may purchase the leased assets or assist the lessor in selling them.
If the assets are sold, the Company is obligated to make up any
deficiency between the lease balance and the proceeds subject to a cap.
The total value of the assets under the existing lease is expected to
be approximately $125 million and is expected to increase to
approximately $175 million in the fourth quarter of 1999.
12.Prior to implementation of the PBR, LG&E and KU employed a fuel
adjustment clause (FAC) mechanism, which under Kentucky law allowed 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 resulting from reviews of the
FAC from November 1994 through April 1998, of which $1.9 million was
refunded in April 1999 for the period beginning November 1994 and
ending October 1996. 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. LG&E requested that
the Commission grant rehearing on the February orders, and further
requested that the Commission stay the refund requirement until it
could rule on the rehearing request. The Commission granted the
request for a stay, and in March 1999 granted part of the request for
rehearing. The Commission also granted rehearing on the KIUC's request
for rehearing on the Commission's determination that it lacked
authority to require the Companies to pay interest on the refund
amounts. The Commission conducted a hearing on the rehearing issues in
June 1999 and is expected to issue a final ruling on rehearing by the
end of 1999. LG&E and KIUC have each filed separate appeals from the
Commission's February 1999 orders with the Franklin Circuit Court. A
decision on the appeals by the Court is not expected until next year.
In July 1999, the Commission issued a series of orders requiring KU to
refund approximately $10.1 million resulting from reviews of the FAC
from November 1994 to October 1998. The orders changed KU's method of
computing fuel costs associated with electric line losses on off-system
sales appropriate for recovery through the FAC, and KU's method for
computing system line losses for the purpose of calculating the system
sales component of the FAC charge. At KU's request, on July 23, 1999,
the Commission stayed the refund requirement pending the Commission's
final determination of any rehearing request that KU may file. In
August 1999, KU filed its request for rehearing of the July orders.
In August 1999, the Commission issued a Final Order in the KU
proceedings, agreeing, in part, with the Company's arguments outlined
in its Petition for Rehearing. While the Commission confirmed that the
Company should change its method of computing the fuel costs associated
with electric line losses, it agreed with KU that the line loss
percentage should be based on the Company's actual line losses incurred
in making off-system sales rather than the percentage used in its Open
Access Transmission Tariff. The Commission also upheld its previous
ruling concerning the computation of system line losses in the
calculation of the FAC. The net effect of the Commission's Final Order
was to reduce the refund obligation to $5.8 million from the original
Order amount of $10.1 million. In August 1999, LG&E and KU each
recorded its estimated share of anticipated FAC refunds of $8.7
million. KU began implementing the refund138,488 - 30(5,596)
All Other -
in October and will continue the refund through September 2000. Both
KU and the KIUC have appealed the Order to the Franklin Circuit Court.
A decision is not expected on the appeal until next year.
13.In August 1999, the Company received a Final Order from the PSC
relating to its Environmental Cost Recovery mechanism which resulted in
the reversal of approximately $1.4 million of the provision for refunds
by KU and LG&E in December 1998.
14.In October 1998, Capital Corp. purchased two natural gas combustion
turbines and began to install them. In July 1999, Capital Corp.
completed installation of the turbines and sold them at cost to LG&E
and KU for $45.7 million and $76.7 million, respectively, following
approval from the Commission. The turbines began commercial operation
in early August 1999.
15.Reference(16,498) (7,639)
Consolidated $1,222,922 $ - $106,744
10.Reference is made to Part II, Legal Proceedings, below and Part I, Item
3, Legal Proceedings, of the Company's, LG&E's and KU's (and NoteNotes 18
and 22 of the Company's Notes to Financial Statements) Annual Reports
on Form 10-
K10-K for the year ended December 31, 1998,1999, and Part II, Item 1,
Legal Proceedings, of the Form 10-Q for the quartersquarter ended March 31,
1999,
and June 30, 1999.2000.
- 3126 -
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Recent Developments
In April 1999, the Kentucky Public Service Commission (the Commission)
issued initial orders in the performance-based ratemaking proceedings for
LG&E and KU. The Commission orders implement, effective July 1999, and
subject to modification, 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 Commission in April 1999. For more information, see Note 8 to the
Notes to Financial Statements under Item 1 and Commodity Price Risk under
Item 3.
In October 1999, a Capital Corp. subsidiary entered into an initial
agreement to purchase six natural gas combustion turbines and is
negotiating terms of a definitive agreement. In connection therewith,
Capital Corp. is pursuing initial development of a possible 1,600 Mw
generation facility in Anderson County, Texas. Should the plant be
developed as presently planned, the aggregate cost is estimated to be
approximately $760 million, portions of which may be independently financed
or shared with eventual outside partners.
In October 1999, a partnership in which Capital Corp. owns an interest sold
to an Ameren Energy Corporation affiliate the natural gas combustion
turbine previously leased by such partnership in Ferndale, Washington. The
Company's indirect proceeds from such sale were approximately $4.5 million.
In August 1999, a Capital Corp. subsidiary entered into an operating lease
for three combustion turbines. The lease has a five year term, but no rent
is payable until the turbines have been completed and installed. Certain
related facilities are expected to be added to the same lease in the fourth
quarter of 1999. The turbines are expected to be used in a 450 Mw gas
fired merchant combustion turbine power generation facility, located in
Monroe, Georgia, which is expected to be completed in June 2001. At the
end of the lease term, the Company may purchase the leased assets or assist
the lessor in selling them. If the assets are sold, the Company is
obligated to make up any deficiency between the lease balance and the
proceeds subject to a cap. The total value of the assets under the
existing lease is expected to be approximately $125 million and is expected
to increase to approximately $175 million in the fourth quarter of 1999.
For more information, see Note 11 to the Notes to Financial Statements
under Item 1.
In July 1999, the Company purchased 100% of the outstanding common stock of
CRC-Evans Pipeline International, Inc. and affiliates (CRC) for initial
consideration of $45.6 million and retirement of approximately $37.9
million in CRC debt. CRC, based in Houston, Texas, is a provider of
specialized equipment and services used in the construction and
rehabilitation of gas and oil transmission pipelines. For more
information, see Note 4 of Notes to Financial Statements under Item 1.
In July 1999, Capital Corp. completed installation of two natural gas
turbines (purchased in October 1998) and sold them at cost to LG&E and KU
for $45.7 million and $76.7 million, respectively, following approval from
the Commission. The turbines began commercial operation in early August
1999.
Effective June 30, 1999, the Company reclassified its natural gas gathering
and processing business to continuing operations from discontinued
operations. For more information, see Note 3 to the Notes to Financial
Statements under Item 1.
In March 1999, the Company acquired an indirect 19.6% ownership interest in
Gas Natural BAN, S.A. (BAN), a natural gas distribution company that serves
1.1 million customers in
- 32 -
the northern portion of the province of Buenos Aires, Argentina. For more
information, see Note 5 of Notes to Financial Statements under Item 1 for
more information.
In March 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 6
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, LEM and 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 or usage loads of power and natural gas; unusual weather;
regulatory decisions, including decisions relating to the
Company's performance-based ratemaking proceedings, legal proceedings,
including the arbitration matter relating to the OPC power contract, and
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-
K10-K for the year ended December 31, 1998.1999.
Results of Operations
The results of operations for LG&E, KU and Capital Corp.'s Argentine gas
distribution CRC 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 SeptemberJune 30, 1999,2000, Compared to
Three Months Ended SeptemberJune 30, 19981999
The Company's primary and diluted earnings per share from continuing
operations increaseddecreased to $.67$.09 in 19992000 from $.61$.39 in 1998. Results for 1999
included $.04 of after-tax charges for fuel adjustment refunds.1999. The decrease
resulted from an asset impairment charge taken on the Company's natural gas
gathering and processing business ($.21) and from recording expenses
related to the Powergen acquisition ($.09). Excluding this item, incomethese nonrecurring
items, earnings per share from continuing operations increased to $.71 in 1999 from
$.61 in 1998. This increase resulted from strong off-system salesremained unchanged at
WKE,
increases resulting from acquiring CRC and BAN in 1999, and lower corporate
expenses. Lower$.39 as higher earnings at LG&E and WKE offset lower earnings at KU, partially offset these increases.an
increase in corporate expenses, and higher interest expense at Capital
Corp.
Including discontinued operations, the Company incurred a loss of $1.11 per
share in the second quarter of 2000. These results include a $155 million
(after tax) charge related to an adjustment of the Company's reserve for
discontinued operations, primarily reflecting the most recent OPC load
forecast, coupled with the increased demand experienced this summer, and
new price forecasts for the OPC and other long-term contracts.
LG&E Results:
LG&E's net income decreased $3.2increased $6.0 million (27%) for the quarter ended SeptemberJune
30, 1999,2000, as compared to the quarter ended SeptemberJune 30, 1998,1999, primarily due
to implementationbecause
of lower operations and maintenance expenses. These expense savings were
partially offset by a decrease in electric retail rates ordered by the
Company's performance based ratemaking proposal
which resulted in a reduction of electric revenues of $ 3.2 million.Kentucky Commission.
- 3327 -
A comparison of LG&E's revenues for the quarter ended SeptemberJune 30, 1999,2000, with
the quarter ended SeptemberJune 30, 1998, excluding the provision for rate
refunds of $1.1 million,1999, reflects increases and decreases which
have been segregated by the following principal causes:
Increase or
(Decrease)
(Thousandscauses (in thousands of $):
Electric Gas
Cause Revenues Revenues
Sales to ultimate consumers:Retail sales:
Fuel and gas supply adjustments $(2,190) $(1,100)
Merger surcredit (900)$ 664 $4,022
Environmental cost recovery surcharge (310) -
Performance based rate bill reduction (3,159)(1,096) -
Demand side management/revenue
decoupling 20Electric rate reduction (5,398) -
Environmental cost recovery (137)Merger surcredit (481) -
Variation in sales volume, etc. 10,116 1,3953,186 806
Total retail sales 3,750 295(3,435) 4,828
Sales for resale 63,789 8(7,958) 1,733
Gas transportation - net - (144)(26)
Other (539) 486700 (208)
Total $67,000 $ 645$(10,693) $6,327
In January 2000, the Kentucky Commission ordered the termination of LG&E's
proposed PBR mechanism. As a result, LG&E refunded certain amounts
collected from its customers during the nine months ended March 31, 2000.
The electric rate reduction resulted from the Kentucky Commission's January
2000 PBR order reducing LG&E's base electric rates.
Electric sales for resale increased $59.1decreased $8 million due to decreases in brokered
sales activities.
Fuel for electric generation and gas supply expenses comprise a large
componentsegment of LG&E's total operating expenses. LG&E had an&E's electric and gas rates
contain a fuel adjustment clause (FAC)and a gas supply clause, respectively,
whereby increases or decreases wouldin the cost of fuel and gas supply may be
reflected in retail rates, subject to the approval of the Public Service Commission
of Kentucky
(PSC). Effective July 2, 1999 the FAC was discontinued and
replaced with an amended electric performance based rate mechanism (PBR).
The PBR is subject to PSC modification. See Note 8 for a further
discussion of the PBR mechanism and Note 12 for a further discussion of the
FAC. LG&E gas rates contain a gas supply clause whereby increases and
decreases in the cost of gas supply may be reflected in retail rates,
subject to PSC approval.Commission. Fuel for electric generation increased $4.2decreased $.7 million (10%(2%) for
the quarter because of a lower cost of coal burned ($.9 million) partially
offset by an increase in volume of generation ($.2 million). Gas supply
expenses increased $5.3 million (40%) due to warmer weatheran increase in the volume of
gas delivered to the distribution system ($5.22.6 million) and an increase in
net gas supply cost ($2.7 million).
Power purchased decreased $6.5 million primarily because of a decrease in
brokered sales activities ($10.1 million), partially offset by a decrease in the cost
of coal burnedincreased
purchases to support sales to other utilities ($13.6 million).
Gas supplyOther operations expenses decreased $.2 million.
Power purchased increased $67$8.9 million primarily due(22.5%) in 2000, as
compared to increased purchases
for sales for resale, including approximately $2 million of expenses
recorded1999, primarily as a result of valuing the Company's electric energy trading
contracts using the mark-to-market method. See Note 7 of Notes to
Financial Statements.
Other operationlower administrative expenses
decreased $2.5 million (6%) primarily due to
decreased operation of($6.8 million) and steam power production costs ($2.12 million).
Maintenance expenses increased $2.1decreased $2.8 million (20%(13.8%) in 19992000 mainly due to
increasesdecreases in scheduled outages at the Mill Creek generating station units 3
and 4 ($1.4 million), and the Cane Run generating
station units 4stations ($2.8 million).
Other income and 6
($.7 million).
- 34 -
Depreciation and amortizationdeductions increased $.8$1.6 million in 1999 because of
additional utility plant in service.
Property and other taxes decreased $.9 million(690%) due to a sales tax accrual
recorded as a resultgains on
the sale of a sales tax audit in the third quarter of last
year.non-utility property.
- 28 -
Variations in income tax expense are largely attributable to changes in pre-
tax income.
Interest charges increased $2.3 million (27%) due to increased borrowings
through the issuance of commercial paper.
KU Results:
KU's net income decreased $12.6$6.2 million (23%) for the quarter ended SeptemberJune 30,
1999,2000, as compared to the quarter ended SeptemberJune 30, 1998. This1999. The decrease is partiallywas
mainly due to recording a net provision forretail rate reductions ordered by the refund of certain
revenues under the fuel adjustment clauseKentucky Commission
early this year and environmental cost recovery
mechanism, as well as the implementation of the Commission ordered
performance-based ratemaking proposal. The after-tax impact of these
regulatory actions is $6.4 million. See Notes 8 and 12 of Notes to
Financial Statements.lower wholesale sales.
A comparison of KU's revenues for the quarter ended SeptemberJune 30, 1999,2000, with the
quarter ended SeptemberJune 30, 1999, reflects increases and (decreases) which have
been segregated by the following principal causes (in thousands of $):
Sales to ultimate consumers:
Fuel supply adjustments $ (1,707)
Environmental cost recovery surcharge (1,342)
Performance based rate reduction (839)
Merger surcredit (299)
Electric rate reduction (8,061)
Variation in sales volume, etc. 6,846
Total retail sales (5,402)
Wholesale sales (18,060)
Other 2,992
Total $(20,470)
The environmental cost recovery surcharges are costs recovered from retail
customers for investments KU made in facilities for compliance with clean
air regulations. As shown above, KU recovered $1.3 million less as
compared with the same quarter 1999.
In January 2000, the Kentucky Commission ordered the termination of KU's
proposed PBR mechanism. As a result, KU refunded certain amounts collected
from its customers during the nine months ended March 31, 2000.
The electric rate reduction resulted from the Kentucky Commission's January
2000 PBR order reducing KU's base electric rates.
On May 4, 1998, excludingLG&E Energy and KU Energy merged. As a result of merger,
the provisionKentucky Commission approved a surcredit for savings achieved from the
merger to be passed to the ultimate consumer over a five-year period. The
reduction to retail sales for the merger surcredit is a reflection of that
rate reduction.
The variation in sales volumes for the quarter ended June 30, 2000,
compared with the quarter ended June 30, 1999, is attributable to higher
volumes resulting from cooler weather early in the quarter and warmer
weather at the end of the quarter.
The decrease in wholesale sales is due to fewer brokered sales marketing
opportunities and the reduced availability of power because of planned
outages at the electric generating plants.
Fuel for electric generation comprises a large segment of KU's total
operating expenses. KU's electric rates contain an FAC, whereby increases
or decreases in the cost of fuel are reflected in retail rates, subject to
the approval of the Kentucky Commission, the Virginia Commission, and the
FERC.
- 29 -
Fuel for electric generation increased $2.1 million (4%) for the quarter
because of an increase in generation ($.5 million) and the cost of coal
burned ($1.5 million).
Power purchased decreased $8.1 million (16%) because there were fewer
opportunities in the brokered sales market as mentioned above.
Other operating expenses decreased by $7.6 million (24%). The decrease was
mainly attributable to lower administrative and general expenses ($4.8
million) as well as decreased customer service and information expenses
($1.3 million), which were the result of further integration of customer
functions.
Maintenance expenses increased by $1.1 million (7%) due to increased
maintenance at the generating plants ($2.5 million) offset by decreases in
transmission maintenance ($1.0 million) and distribution maintenance ($.3
million).
Depreciation and amortization increased due to additional utility plant in
service.
Variations in income tax expense are largely attributable to changes in
pretax income.
LG&E Capital Corp. and Other Results:
Power Operations
Power Operations' equity in earnings of unconsolidated ventures decreased
from $8.6 million in 1999 to $6.5 million in 2000. The decrease reflects
proceeds received from bankruptcy settlements related to the Company's
windpower partnerships in the second quarter of 1999.
Power Operations' other income increased from $.1 million expense in 1999
to $1.4 million income in 2000. The increase resulted from recognizing a
gain on the sale of KUCC Cleburne in the second quarter of 2000. Interest
income increased from $2.4 million in 1999 to $3.7 million in 2000 due to
an increase in cash resulting from asset sales.
Western Kentucky Energy
WKE's revenues decreased from $69.1 million in 1999 to $67.0 million in
2000 due mainly to lower off-system sales. WKE's cost of revenues
decreased from $41.3 million in 1999 to $35.8 million in 2000 due to a
decrease in purchased power.
WKE's operation and maintenance expenses decreased from $26.6 million in
1999 to $24.3 million in 2000 due mainly to a decrease in payroll-related
benefits expenses.
Argentine Gas Distribution
The Argentine Gas Distribution companies' net income increased from $4.8
million in 1999 to $6.7 million in 2000 due mainly to an increase in net
revenues and higher equity in the earnings of Gas BAN.
Other
Other revenues increased from $73.4 million in 1999 to $77.8 million in
2000. The increase resulted from acquiring CRC-Evans in July 1999 and from
increased sales in the Company's natural gas gathering and processing
business, partially offset by a decrease in Retail Access Services'
revenues and lower energy marketing revenues.
Other cost of revenues decreased from $64.8 million in 1999 to $62.3
million in 2000. The decrease resulted from a decrease at Retail Access
Services and lower energy marketing
- 30 -
cost of revenues, partially offset by an increase resulting from acquiring
CRC-Evans in July 1999 and increased sales in the Company's natural gas
gathering and processing business.
The Company recorded asset-impairment and other non-recurring charges
totaling $59.7 million during the second quarter of 2000. See Notes 2 and
4 of Notes to Financial Statements under Item 1 for more information.
Other income for Capital Corp. and Other increased from $1.3 million in
1999 to $2.7 million in 2000. The increase resulted from recognizing the
gain on the sale of the Company's interest in KUCC Cleburne in the second
quarter of 2000.
Capital Corp. and Other interest expense increased from $13.0 million in
1999 to $14.6 million in 2000. The increase resulted from funding
discontinued operations, corporate operating expenses, and the Gas BAN and
CRC acquisitions. The Company's consolidated effective income tax rate
decreased from 36.1% in 1999 to 25.3% in 2000 due to an increase in
investment and wind tax credits as a percent of pretax income.
Six Months Ended June 30, 2000, Compared to
Six Months Ended June 30, 1999
The Company's primary and diluted earnings per share from continuing
operations decreased to $.32 in 2000 from $.82 in 1999. The decrease
resulted from an asset impairment charge taken on the Company's natural gas
gathering and processing business ($.21), recognizing expenses associated
with the integration of the Company's two utilities ($.09), and from
recording expenses related to the Powergen acquisition ($.09). Excluding
these nonrecurring items, earnings per share from continuing operations
decreased from $.82 in 1999 to $.71 in 2000. This decrease resulted from
lower earnings at KU, decreases resulting from recognizing one-time items
in 1999, a decrease resulting from acquiring CRC-Evans in July 1999, and
higher interest expense at Capital Corp. Higher earnings at LG&E and WKE
partially offset these decreases. The one-time items recognized in 1999
consisted of a gain on the sale of the Company's interest in the Rensselaer
project, proceeds from bankruptcy settlements related to the Company's
windpower partnerships, and fees related to the development of an
independent power project in Gregory, Texas.
LG&E Results:
LG&E's net income increased $4.5 million (11%) for the first six months of
2000, as compared to the first six months of 1999, primarily because of
lower operations and maintenance expenses, a decrease in power purchased
and an increase in electric sales to other utilities. These expenses are
partially offset by a decrease in electric rates, a decline in brokered
sales transactions, a nonrecurring net of tax charge of $4.9 million for
costs associated with further integration of KU and LG&E, and the reversal
of various rate refunds of $6.2$1.4 million net of tax. Excluding the one-time
charges for the One-Utility Program and the reversal of provisions for
certain rate refunds, LG&E's net income would have increased $8.0 million.
- 31 -
A comparison of LG&E's revenues for the six months ended June 30, 2000,
with the six months ended June 30, 1999, excluding the reversal of
provisions for certain rate refunds of $2.3 million, reflects increases and
decreases which have been segregated by the following principal causes:
Sales to ultimate consumers:causes (in
thousands of $):
Electric Gas
Cause Revenues Revenues
Retail sales:
Fuel clauseand gas supply adjustments $ (2,921)(1,820) $14,029
Environmental cost recovery 396
Merger surcredit (603)surcharge (724) -
Performance based rate bill reduction (2,914)(2,275) -
Electric rate reduction (7,005) -
Merger surcredit (931) -
Variation in sales volume, etc. 2,0661,687 (1,638)
Total retail sales (3,976)(11,068) 12,391
Sales for resale 44,4387,828 6,453
Gas transportation - net - 163
Other 1,124689 (143)
Total $41,586$ (2,551) $18,864
In January 2000, the Kentucky Commission ordered the termination of LG&E's
proposed PBR mechanism. As a result, LG&E refunded certain amounts
collected from its customers during the nine months ended March 31, 2000.
The increase in saleselectric rate reduction resulted from the Kentucky Commission's January
2000 PBR order reducing LG&E's base electric rates.
Sales for resale was primarilyincreased due to more aggressive
marketing efforts.increased sales to other utilities.
Fuel for electric generation comprises a large component of KU's total
operating expenses. KU's Kentucky jurisdictional electric rates were
subject to an electric fuel adjustment clause (FAC) whereby increases or
decreases would be reflected in retail rates, subject to the approval of
the Public Service Commission of Kentucky (PSC). Effective July 2, 1999
the FAC was discontinued and replaced with an amended electric performance
based rate mechanism (PBR). The PBR is subject to PSC modification. See
Note 8 for a further discussion of the PBR mechanism and Note 12 for a
further discussion of the FAC. KU's wholesale and Virginia jurisdictional
electric rates contain a fuel adjustment clause whereby increases or
decreases in the cost of fuel are reflected in rates, subject to the
approval of the Virginia State Corporation Commission and the Federal
Energy Regulatory Commission. Fuel for electric generation expenses
decreased by $4.8increased $6.7 million (7%(9%) for the quartersix months
because of an increase in generation ($11 million) partially offset by
lower cost of coal burned ($4.3 million).
Gas supply expenses increased $18.2 million (28%) due to an increase in gas
prices ($19.2 million) partially offset by a decrease in the volume of gas
delivered to the distribution system ($1 million).
Power purchased decreased $7.8 million primarily because of a decrease in
generation.
Power purchasedbrokered sales activities ($13.1 million), partially offset by increased
$64 million. The increase wassales to other utilities ($5.3 million).
Other operation expenses decreased $4 million (5%) primarily as a result of
lower administrative expenses ($10.3 million) and steam production costs
($1.3 million) partially offset by a one-time expense of $8.1 million for
the Company's One-Utility Program.
Maintenance expenses for the first six months of 2000 decreased $3.6
million (10%) primarily due to a
160% increasedecreases in megawatt-hour purchases which was used to supportscheduled outages at the aforementioned sales for resale as well as an increase in reserve margin
purchases.
- 35 -
Maintenance expense decreased $2Mill
Creek and the Cane Run generating stations ($4.3 million), and electric
distribution maintenance ($1.1 million), partially offset by increased
software maintenance costs ($1.9 million).
Other income and deductions increased $2.1 million (13%(157%) due to a decrease in
maintenance activities atgains on
the steam generating plants.sale of non-utility property.
- 32 -
Variations in income tax expense are largely attributable to changes in pre-
tax income.
Capital Corp.Interest charges increased $3.8 million (21%) due to the issuance of
commercial paper.
KU Results:
Capital Corp.,KU's net income decreased $15.7 million (28%) for 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 representssix months ended June
30, 2000 as compared to 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. also engages in other energy-related businesses (Other Energy-
Related Businesses) which are not individual distinct segments of the
business. These include CRC, a provider of specialized equipment and
services used in the construction and rehabilitation of gas and oil
transmission pipelines, Enertech, a commercial and retail initiative
designed to assess the energy and utility needs of large commercial and
industrial entities, and LG&E Home Services, a maintenance and repair
service for customers' major household appliances, and third party metering
and billing services. These also include the gas gathering and processing
business, which consists of certain natural gas transportation, storage,
gathering and processing operations and facilities.
Independent Power Operations
Independent Power Operations' equity in earnings of unconsolidated ventures
increased from $1.8 million in 1998 to $5.4 million insix months ended June 30, 1999. The increase
resulted mainly from writing off the $3.8decrease
was partially due to a non-recurring charge of $6.6 million, investment in Windpower
Partners 1994 in the third quarter of 1998, offset by lower equity in
earnings at the Rensselaer project in 1999 resulting from the sale of this
projectafter tax,
made in the first quarter of 2000 for costs associated with further
integration of KU and LG&E. Excluding this non-recurring charge, net
income decreased $9.2 million, mainly due to rate reductions ordered by the
Kentucky Commission early in 2000 and lower ROVA I capacity payments from
Virginia Electric and Power duringwholesale sales.
A comparison of KU's revenues for the third quarter of 1999.
Western Kentucky Energy
Western Kentucky Energy (WKE) began operations in July 1998, upon
commencement of its lease transactionsix months ended June 30, 2000, with
Big Rivers.
WKE's revenues and cost of revenues increased from $66.2 million and $29.3
million, respectively, in 1998 to $144.4 million and $100.8 million,
respectively, in 1999. These increases resulted mainly from higher off-
system sales in 1999.
WKE's operation and maintenance expenses decreased from $25.8 million in
1998 to $21.5 million in 1999 due to reclassifying reagent and disposal
expenses from operation and maintenance expenses in 1998 to cost of
revenues in 1999. One-time expenses paid in 1998 to Big Rivers Electric
Corporation for storage and unloading of fuel acquired at closing also
contributed to the decrease.
- 36 -
Argentine Gas Distribution
The Argentine Gas Distribution companies' revenues increased 2% or $1.1
million in 1999 to $48.5 million due to higher consumption per customer and
an increase in the customer base. Operation and maintenance expenses
decreased by 21.4% or $1.4 million over the same period.
The Argentine Gas Distribution companies' equity in earnings of
unconsolidated ventures increased from $1.0 million in 1998 to $4.7 million
in 1999 due to acquiring a 19.6% interest in BAN in March 1999. See Recent
Developments and Note 5 of Notes to Financial Statements in Item 1.
Other
As a result of the reclassification of the gas gathering and processing
business from discontinued operations to continuing operations effectivesix months ended June 30, 1999, the Company's activities include certain natural gas
transportation, storage, gathering and processing operations and
facilities, which businesses are conducted through Capital Corp. Its
activities also include those of CRC, a provider of specialized equipment
and services used in the construction and rehabilitation of gas and oil
transmission pipelines, which the Company acquired in July 1999.
Additionally, the Company conducts various commercial and retail
initiatives, primarily energy-related new businesses and services designed
to leverage its existing assets, operations and market presence, which
commercial and retail initiatives have not had a significant impact on the
Company's financial position or required significant capital investment.
Other Energy-Related Businesses' revenues increased from $45.6 million in
1998 to $99.1 million in 1999, and its cost of revenues increased from
$38.4 million in 1998 to $73.1 million in 1999. These increases reflect
the CRC acquisition in July 1999 and higher natural gas sales. See Note 4
for a discussion of the CRC acquisition and see Note 3 for a discussion of
the Company's decision to retain its natural gas gathering and processing
business.
Other Energy-Related Businesses' operation and maintenance expense
increased from $9.0 million in 1998 to $14.9 million in 1999 due mainly to
acquiring CRC.
Capital Corp.'s interest expense increased from $6.6 million in 1998 to
$12.0 million in 1999 mainly due to funding the BAN and CRC acquisitions,
the WKE transaction, discontinued operations and corporate expenses.
Nine Months Ended September 30, 1999, Compared to
Nine Months Ended September 30, 1998
The Company's primary and diluted earnings per share from continuing
operations increased to $1.49 in 1999 from $1.06 in 1998. Results for 1998
included $.41 of after-tax charges for merger-related costs ($.19 for LG&E,
$.17 for KU, and $.05 for Corporate), and an after-tax gain of $.16
resulting from the Rensselaer project's Master Restructuring Agreement
(MRA) with Niagara Mohawk Power Corporation (NIMO). Results for 1999
included $.05 of after-tax charges for fuel adjustment refunds ($.04 for KU
and $.01 for LG&E). Excluding these items, income from continuing
operations increased to $1.54 in 1999 from $1.31 in 1998. This increase
resulted from higher earnings at Capital Corp, partially offset by lower
earnings at LG&E (excluding merger-related costs).
LG&E Results:
LG&E's net income increased $14.4 million for the first nine months of
1999, as compared to the first nine months of 1998, primarily because of
the charge incurred in 1998 for
- 37 -
LG&E's cost to merge LG&E Energy Corp. with KU Energy of $25 million.
Excluding this charge, LG&E's net income decreased $10.6 million for the
same period. This is primarily due to increased maintenance expenses at
electric generating plants.
A comparison of LG&E's revenues for the nine months ended September 30,
1999, with the nine months ended September 30, 1998, excluding the
provision for rate refunds of $1.6 million, reflects increases and decreases(decreases)
which have been segregated by the following principal causes:
Increase or
(Decrease)
(Thousandscauses (in thousands
of $)
Electric Gas
Cause Revenues Revenues:
Sales to ultimate consumers:
Fuel and gas supply adjustments $(2,102) $(26,851)
Merger surcredit (3,756) -$ (840)
Environmental cost recovery surcharge (2,614)
Performance based rate bill reduction (3,159) -
Demand side management/revenue
decoupling (3,075) (6,220)
Environmental cost recovery (169) -(1,732)
Merger surcredit (733)
Electric rate reduction (12,140)
Variation in sales volume, etc. 17,750 13,04912,119
Total retail sales 5,489 (20,022)
Sales(5,940)
Wholesale sales (16,751)
Other 2,651
Total $(20,040)
The environmental cost recovery surcharges are costs recovered from retail
customers for resale 88,341 420
Gas transportation - net - (412)
Other (478) 791
Total $93,352 $(19,223)
Salesinvestments KU made in facilities for resale increasedcompliance with clean
air regulations. As shown above, KU recovered $2.6 million less for the
six months ended June 30, 2000 as compared with the six months ended June
30, 1999.
In January 2000, the Kentucky Commission ordered the termination of KU's
proposed PBR mechanism. As a result, KU refunded certain amounts collected
from its customers during the nine months ended March 31, 2000.
The electric rate reduction resulted from the Kentucky Commission's January
2000 PBR order reducing KU's base electric rates.
On May 4, 1998, LG&E Energy and KU Energy merged. As a result of merger,
the Kentucky Commission approved a surcredit for savings achieved from the
merger to be passed to the ultimate consumer over a five-year period. The
reduction to retail sales for the merger surcredit is a reflection of that
rate reduction.
Variation in sales volumes is mainly due to increased brokered sales.
Gas retailhigher volumes this year as
compared to the same period last year. The higher volumes (288,137 Mwh)
are attributable to an increase in the number of customers served as well
as warmer weather this period as compared to the same period last year.
The decrease in wholesale sales decreased from 1998is due to fewer brokered sales marketing
opportunities and the reduced availability of power because of planned
outages at the electric generating plants.
- 33 -
Fuel for electric generation decreased $0.5 million (.5%) because of a
declinedecrease in gas pricesgeneration ($1.0 million) which was partially offset by the
increased cost of coal burned ($.5 million).
Power purchased decreased $8.6 million (9.5%) because there were fewer
opportunities in the first quarterbrokered sales market as mentioned above.
Non-recurring charges of 1999.
Gas supply$6.6 million, after tax, include the costs
associated with the Company's One-Utility Program.
Other operating expenses decreased $16.7by $5.9 million (19%(10%) due. The decrease was
mainly attributable to a decrease in net
gas supply costsadministration and general expenses
($20.74.2 million) partially offset by an increase in the
volume of gas delivered to the distribution systemand customer service and information expenses ($4.01.1
million).
Power purchasedMaintenance expenses increased $96.2by $2.7 million (224%(10%) primarily due to increased
purchases for sales for resale.
Other operation expenses decreased $3.7 million (3%) for the nine months
ended September 1999 as compared to same period ended September 1998
primarily due to lower steam power production expenses.
Maintenance expenses for the first nine months of 1999 increased $13.7
million (40%) primarily due to increases in scheduled outagesmaintenance at the Mill
Creek generating station units 3 and 4, and the Cane Run generating station
units 4 and 6 ($7.5 million), increased forced outages at Mill Creek units
1 and 4 and Cane Run unit 5 ($3.9 million), and general repairs at the
electricsteam generating plants ($2.43.4 million). which was offset
by decreases in transmission ($1.1 million) and distribution ($.5 million)
maintenance.
Depreciation and amortization increased $2.5 million in 1999 because ofdue to additional utility plant in
service.
- 38 -
A $34.1 million one-time charge was recorded in the second quarter of 1998
for costs associated with the merger of LG&E Energy Corp. and KU Energy
(the corresponding tax benefit of $9.1 million is recorded in Other
income).
Variations in income tax expense are largely attributable to changes in
pre-
tax income as well as non-deductible merger expenses.
KU Results:
KU's net income increased $20.9 million for the nine months ended September
30, 1999, as compared to the nine months ended September 30, 1998,
primarily because of a $21.7 million one-time, after tax charge incurred in
1998 for KU's costs to mergepretax income.
LG&E Energy Corp. with KU Energy.
A comparison of KU's revenues for the nine months ended September 30, 1999,
with the nine months ended September 30, 1998, excluding the provision for
rate refunds of $6.2 million, reflects increases and decreases which have
been segregated by the following principal causes:
Sales to ultimate consumers:
Fuel clause adjustments $ (2,626)
Environmental cost recovery (684)
Merger surcredit (3,767)
Performance based rate bill reduction (2,914)
Variation in sales volume, etc. 12,499
Total retail sales 2,508
Sales for resale 104,065
Other 1,858
Total $108,431
The increase in sales for resale was primarily due to more aggressive
marketing efforts and 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.
Power purchased increased $112 million. The increase was primarily due to
a 53% increase in megawatt-hour purchases which was primarily used to
support the aforementioned sales for resale as well as an increase in
reserve margin purchases.
Maintenance expense decreased $3.5 million (8%) due to decreases in
maintenance at the steam generating plants and the transmission and
distribution systems.
A $21.8 million one-time charge was recorded in the second quarter of 1998
for the merger of LG&E EnergyCapital Corp. and KU Energy.
Variations in income tax expense are largely attributable to changes in pre-
tax income as well as non-deductible merger expenses.
Capital Corp.Other Results:
Independent Power Operations
Independent
Power Operations' revenues increaseddecreased from $15.0 million in 1998
to $18.5$13.1 million in 1999 due to recognizing previously deferred income
related to the sale of the
- 39 -
Rensselaer project in March 1999. See Note 6 of Notes to Financial
Statements under Item 1.
Independent Power Operations' depreciation and amortization decreased from
$4.3$10.6
million in 1998 to $2.6 million2000. The decrease resulted mainly from recognizing revenues in
1999 due to writing off certain
capitalized interest and development costs related to the San Miguel
facility in the first quarter of 1998 and to write-offs related to the Rensselaer project's MRA with NIMOproject, which the Company sold in March
1999.
Power Operations' operation and maintenance expense decreased from $5.5
million in 1999 to $3.4 million in 2000. The decrease resulted primarily
from writing off assets related to the second quarter of 1998.
IndependentRensselaer project in 1999.
Power Operations' equity in earnings of unconsolidated ventures decreased
from $57.4$30.0 million in 19981999 to $35.4$12.2 million in 1999. The
decrease resulted mainly from2000, due to recognizing a
pretax gain of $15.4 million on the sale of the Rensselaer project in June 19981999
and to receiving proceeds from bankruptcy settlements related to the
Rensselaer project's NIMO MRA,Company's windpower partnerships in the second quarter of 1999.
Western Kentucky Energy
WKE's revenues decreased from $129.0 million in 1999 to $127.7 million in
2000 due mainly to lower off-system sales, partially offset by the Rensselaer
project's sale of substantially all of its assets and major contracts in
March 1999. An increase resulting from writing off the investment in
Windpower Partners 1994 in the third quarter of 1998 also offset the
overall decrease.
Independent Power Operations' other income and expense changed from $8.9
million expense in 1998higher sales
to $1.7 million income in 1999 due primarily to
reacquiring in 1998 half of the Company's interest in the partnership that
owned the Rensselaer project, and to recording related expenses.
Western Kentucky Energy
WKE began operations in July 1998, after closing its lease transaction with
Big Rivers.industrial customers. WKE's revenues and cost of revenues increaseddecreased from $66.2$77.0
million and $29.3 million, respectively, in 1998 to $273.5 million and
$177.9 million, respectively, in 1999. These increases resulted from WKE's
operating for nine months in 1999 compared to only two and one-half months$71.0 million in 1998. Increases2000 due to a decrease in off-system sales in the third quarter of 1999 also
contributed to the increase.purchased
power.
WKE's operation and maintenance expenses decreased from $50.6 million in
1999 to $48.8 million in 2000 due mainly to a decrease in payroll-related
benefits expenses. WKE's depreciation and amortization expense increased
from $25.8$1.5 million in 19981999 to $72.1$2.9 million in 1999. This increase resulted2000 due to increased
expenditures for information systems conversions.
WKE's interest income increased from WKE's operating for
nine months$.4 million in 1999 compared to only two and one-half months$1.4 million in
1998.2000 due to an increase in the note receivable from Big Rivers.
- 34 -
Argentine Gas Distribution
The Argentine Gas Distribution companies' revenuesnet income increased 4.5% or $5.4from $5.2
million in 1999 to $123.4$6.0 million in 2000 due mainly to higher consumption per customer
and an increase in the customer base. Operationnet
revenues and maintenance expenses
decreased by 6.7% or $1.2 million over the same period.
The Argentine Gas Distribution companies'higher equity in the earnings of unconsolidated venturesGas BAN.
Other
Other revenues increased from $2.2 million in 1998 to $8.4$138.5 million in 1999 due to $152.8 million in
2000. The increase resulted from acquiring CRC-Evans in July 1999 and from
increased sales in the Company's natural gas gathering and processing
business, partially offset by a 19.6% interestdecrease in BANRetail Access Services'
revenues and lower energy marketing revenues. Fees received in March 1999.1999
related to the development of an independent power project in Gregory,
Texas, partially offset the increases also.
Other cost of revenues increased from $112.7 million in 1999 to $123.0
million in 2000. The increase resulted from acquiring CRC-Evans in July
1999 and from increased sales in the Company's natural gas gathering and
processing business, partially offset by a decrease at Retail Access
Services and lower energy marketing cost of revenues.
The Company recorded asset-impairment and other non-recurring charges
totaling $80.4 million during the six months ended June 30, 2000. See
Note 5Notes 2, 3 and 4 of Notes to Financial Statements inunder Item 1.1 for more
information.
Other income for Capital Corp. and Other Energy-Related Businesses' revenues increased from $116.3 million in
1998 to $237.6$4.6 million in
1999 and its cost of revenues increased from
$94.0to $6.9 million in 1998 to $185.9 million2000. The increase resulted from recognizing the
gain on the sale of the Company's interest in 1999. These increases reflect
increases at Retail Access Services, higher natural gas sales,KUCC Cleburne in the second
quarter of 2000 and the CRC
acquisition.
Other Energy-Related Businesses' operation and maintenance expense
increasedgain on the sale of the Company's interest in CEC-
APL L.P. in the first quarter of 2000. Higher interest income also
contributed to the increase. Decreases resulting from $21.6 million in 1998 to $31.6 millionpayments received in
1999 due mainlyrelated to acquiring CRC.
- 40 -
Other Energy-Related Businesses' other income increased from $3.0 million
in 1998 to $7.6 million in 1999 due mainly to receivingthe Rensselaer sale and the initial settlement of a claim
related toon an undeveloped independent power project in California.California partially offset
the increases.
Capital Corp.'s and Other interest expense increased from $17.5 million in 1998 to
$35.1$23.2 million in
1999 due mainly to $27.8 million in 2000. The increase resulted from funding
discontinued operations, corporate operating expenses, and the Gas BAN and
CRC acquisitions,
the WKE transaction, discontinued operationsacquisitions. The Company's consolidated effective income tax rate
decreased from 37.2% in 1999 to 32.6% in 2000 due to an increase in
investment and corporate expenses.wind tax credits as a percent of pretax 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, and information system
enhancements.enhancements, and other business development 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 ninesix months ended SeptemberJune 30, 1999,2000, of $291.9$157.3
million were financed with internally generated funds and commercial paper.
The Company's combined cash and marketable securities balance decreased
$22.1$35.7 million during the ninesix months ended SeptemberJune 30, 1999.2000. The decrease
reflects construction expenditures
the investment in BAN, the
acquisition of CRC- 35 -
and dividends paid, partially offset by cash flows from operations,
proceeds received from sales of investments in affiliates, and a net
increase in debt, the Company's portion of the proceeds
received by the Rensselaer project from the sale of its assets and major
contracts, and proceeds received from the sale of four combustion turbines
held under a leveraged lease.debt.
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 increasedecrease in accounts receivable during the six months ended June
30, 2000, resulted primarilymainly from seasonal fluctuations at LG&E and WKE, and a
decrease in LG&E's, KU's, and WKE's businesses, the CRC acquisition,
and higherbalance at Retail Access Services, partially offset by
seasonal fluctuations at the Company's natural gas gathering and processing
revenues.business and an increase in Centro's balance. The decrease in accounts
payable resulted mainly from seasonal fluctuations at LG&E, KU and WKE, and
a decrease in LG&E's and KU's businesses,the balance at Retail Access Services, partially offset by
seasonal fluctuations in Distribuidora de Gas del
Centro's (Centro's)at the Company's natural gas gathering and processing
business and an increase resulting from acquiring CRC.
The increase in other materials and supplies resulted from acquiring CRC.
The increase in net assets of discontinued operations resulted from a
decrease in the reserve, partially offset by a decrease in net price risk
management assets, a seasonal increase in accounts payable and a decrease
in cash.Centro's balance. The decrease in cashgas stored
underground resulted from seasonal fluctuations and from
a large transaction settlement near the end of the period.at LG&E.
The increase in investments in unconsolidated ventures resulted from the
investment in BAN and equity in earnings, partially offset by selling the
investment in the Rensselaer venture and distributions received.
The increasedecrease in non-utility property and plant resulted mainly from acquiring CRC and from additions at Centro and WKE.recording an
impairment charge in the second quarter of 2000. See Note 4 of Notes to
Financial Statements under Item 1 for more information. The decreaseincrease in
other property and investments resulted from reclassifyingexpenditures related to the
twopurchase of combustion turbines purchased by Capital Corp.
to LG&E's and KU's utility property
accounts. In July 1999, Capital Corp. completed installation of the
turbines and sold them at cost to LG&E and KU for $45.7 million and $76.7
million, respectively. The turbines began commercial operation in early
August 1999.
- 41 -
The increase in deferred debits and other assetsnet liabilities of discontinued operations resulted from recording
goodwill related toan
increase in the CRC acquisition, and to capitalizing costs related
to the combustion turbine power generation facility in Monroe, Georgia.Company's accrued loss on disposal of discontinued
operations.
Long-term debt due within one year(including current portion) increased by $68.7 million due
to Capital Corp.'s issuing new debt and
reclassifying amounts from noncurrent to current.
The Company issues commercial paper that has maturity dates ranging between
one and 270 days. The Company had outstanding commercial paper$150 million of $393.2
million at September 30, 1999, at a weighted-average interest rate of
5.65%. Because of the rollover of these maturity dates, total short-term
borrowings and repayments during the first nine months of 1999 totaled $3.9
billion. See Note 16 of the Company's Notes to Financial Statements
containedmedium-term notes in its Annual Report on Form 10-K for the year ended December 31,
1998.
The increase in other current liabilities resulted from acquiring CRC and
from differences in the timing of estimated income tax payments. The
increase in long-term debt resulted from additional borrowings,June 2000,
partially offset by reclassifications to current.
In October 1999, a Capital Corp. subsidiary entered into an initial
agreement to purchase six natural gas combustion turbinesLG&E's redeeming its first mortgage bonds 7.5% series
due July 1, 2002, in January 2000, and is
negotiating terms of a definitive agreement. In connection therewith,
Capital Corp. is pursuing initial development of a possible 1,600 Mw
generation facility in Anderson County, Texas. Should the plant be
developed as presently planned, the aggregate cost is estimated to be
approximately $760 million, portions of which may be independently financed
or shared with eventual outside partners.
In August 1999, a Capital Corp. subsidiary entered into an operating lease
for three combustion turbines. The lease has a five year term, but no rent
is payable until the turbines have been completed and installed. Certain
related facilities are expected to be added to the same lease in the fourth
quarter of 1999. The turbines are expected to be used in a 450 Mw gas
fired merchant combustion turbine power generation facility, located in
Monroe, Georgia, which is expected to be completedby KU's redeeming its Series Q 5.95%
bonds due June 15, 2000, in June 2001.2000.
At the
end of the lease term, the Company may purchase the leased assets or assist
the lessor in selling them. If the assets are sold, the Company is
obligated to make up any deficiency between the lease balance and the
proceeds subject to a cap. The total value of the assets under the
existing lease is expected to be approximately $125 million and is expected
to increase to approximately $175 million in the fourth quarter of 1999.
At SeptemberJune 30, 1999,2000, unused capacity under the Company's lines of credit
totaled $504.8$469.3 million after considering commercial paper support and
approximately $62.0$47.0 million in letters of credit securing on- and off-
balance sheet commitments. At December 31, 1998, unused capacityKU maintains an uncommitted borrowing facility
of $100 million.
Standard and Poor's downgraded LG&E's, KU's and Capital Corp.'s debt
ratings on February 28, 2000. The downgrades reflect S&P's opinion of the
credit quality of the Companies following the impact of the Kentucky
Commission rate reduction and the OPC decision. S&P, Moody's and Fitch
continue to 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.
In July 2000, Fitch (formerly Duff and Phelps) downgraded the long-term
debt of Capital Corp. to BBB+ following the announcement of the increase in
the discontinued operations reserve. Also during the second quarter of
2000, Capital Corp.'s commercial paper rating changed from D-1- to F-2 as a
result of the merger of Fitch and Duff and Phelps.
Also in July 2000, the Company announced plans to build up to ten natural
gas fired combustion turbines. The Company will build the turbines in
Kentucky and Georgia to meet the native load commitments of its two
utilities and to mitigate its exposure related to the OPC contract. The
Company has not arranged, but has under consideration, several possible
methods of financing the construction of the turbines, including the use of
new short- or long-term credit facilities or the use of project or lease
financing.
Certain of Capital Corp.'s long-term debt agreements require the Company to
maintain a debt-to-capitalization ratio not greater than 65%. The
Company's debt-to-capitalization ratio at June 30, 2000, as defined in
those agreements, equaled an amount just under 65%. Capital Corp. is
pursuing a variety of actions to avoid any event of default under the
lines of credit totaled $536.8 million. The decrease in unused capacity
resulted from additional borrowing during- 36 -
agreements, including selling the nine months ended September
30, 1999.
Capital Corp. has provided letters of credit issuedgas facilities business and certain asset
securitization programs to third partiesreduce working capital requirements and debt,
and is working with the financial institutions to secure certain off-balance sheet obligations (including contingent
obligations) of its subsidiaries. The letters of credit securing such
obligations totaled approximately $23.0 million at September 30, 1999. For
more information, see Notes 17 and 18obtain standstill
agreements or waivers of the Company's Notes to Financial
Statements in its Annual Report on Form 10-K for the year ended December
31, 1998.
- 42 -
65% debt-to-capitalization limit.
The Company's capitalization ratios at September 30, 1999, and December 31,
1998, follow:
Sep.June 30, Dec. 31,
2000 1999 1998
Long-term debt (including current portion) 48.0% 46.5%54.3% 49.8%
Notes payable 11.1 11.212.6 13.1
Preferred stock 3.8 4.24.3 3.9
Common equity 37.1 38.128.8 33.2
Total 100.0% 100.0%
LG&E's capitalization ratios at September 30, 1999, and December 31, 1998,
follow:
Sep.June 30, Dec. 31,
2000 1999 1998
Long-term debt (including current portion) 44.6% 45.0%39.7% 41.1%
Notes payable 8.6 7.9
Preferred stock 6.8 6.86.2 6.2
Common equity 48.6 48.245.5 44.8
Total 100.0% 100.0%
KU's capitalization ratios at September 30, 1999, and December 31, 1998,
follow:
Sep.June 30, Dec. 31,
2000 1999 1998
Long-term debt (including current portion) 44.8% 45.7%41.0% 44.7%
Notes payable 2.5 0.0
Preferred stock 3.4 3.3 3.4
Common equity 51.9 50.953.1 52.0
Total 100.0% 100.0%
In May 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 in April
1999, to hedge the entire issuance, the effective rate amounted to 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.
In September 1999, Capital Corp. issued $50 million of floating rate notes
under its medium-term note program. The notes mature in September 2000 and
pay interest at a rate equal to the one-month LIBOR plus 0.10%.
LG&E implemented a new $200 million commercial paper program in November
1999. An initial issuance of notes totaling $120.1 million took place on
November 8. A majority of the proceeds were used in connection with
capital requirements relating to the joint acquisition by LG&E and KU of
combustion turbines from LG&E Capital Corp., which occurred in July 1999.
See Recent Developments for common stock repurchase activities in
connection with the CRC acquisition.
For a description of significantcertain contingencies that may affect the Company,
LG&E and KU, reference is made to Part II herein - Item 1, Legal
Proceedings.
- 43 -
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.
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 October 1999, the Company and its subsidiaries have completed the
internal inventory, vendor survey, compliance assessment, remediation and
testing and contingency planning portions (Phases I, II and III) of their
Year 2000 plan for critical equipment and systems, including IT, non-IT and
embedded components. A substantially similar readiness state exists for
all non-critical systems. Training and drill scenarios on contingency plan
actions have been initiated for appropriate critical systems and will
continue throughout 1999.
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 has evaluated and, in certain
cases, initiated follow-up actions regarding the responses from these
parties.
- 44 -
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 September 1999,
the Company incurred approximately $26.1 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 $6.0
million to complete its Year 2000 efforts.
Through September 1999, LG&E incurred approximately $18.4 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
$2.2 million to complete its Year 2000 efforts.
Through September 1999, KU incurred approximately $4.8 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 $2.1
million to complete its Year 2000 efforts.
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 significantly completed the
implementation of its Year 2000 plan. Based upon the information currently
known regarding its internal operations and assuming successful and timely
completion of remaining remediation and contingency plan actions, 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 has been completed for material areas of Year 2000
risk. This effort has addressed certain areas, including the most
reasonably likely worst-case scenarios, delays in completion of any
remaining remediation plans, failure or incomplete remediation results and
failure of key third parties to be Year 2000 compliant. Contingency plans
include provisions for extra staffing, back-up communications, review of
unit dispatch and load shedding procedures, carrying of additional energy
reserves and manual energy ac
- 45 -
counting procedures. Contingency plan formulation has been completed and
final implementation, resourcing and drilling of such plans is underway.
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.
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.
Interest Rate Risk
The potential change in interest expense resulting from changes in base
interest rates of the Company's unswapped debt did not change materially
during the nine monthsthree- and six-month periods ended SeptemberJune 30, 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 during
the nine monthsthree- and six-month periods ended SeptemberJune 30, 1999. See Item 7 of the Company's
report on Form 10-K for the year ended December 31, 1998.
Commodity Price Risk2000. The Company's
exposure to market risks from changes in commodity prices did
not change materially during the nine months ended September 30, 1999.
However, as a result of the Commission's approval of the PBR effective July
1999, (subject to future change) LG&E's and KU's fuel adjustment clause
mechanism was withdrawn and replaced with a cap that limits recovery of
actual changes in fuel cost to changes in a fuel price index for a five-
state region. If the utilities outperform the index, benefits will be
shared equally between shareholders and customers. If the utilities' fuel
costs exceed the index, the difference will be absorbed by the Company's
shareholders.
Capital Corp. through its subsidiaries operates and controls the generating
capacity of Big Rivers and the City of Henderson. Some of the excess
capacity generated by Big Rivers and the City is currently being marketed
by WKE. To mitigate residual risks relative to the movements in
electricity prices, WKE has entered into primarily fixed-priced contracts
for the sale of electricity through the wholesale electricity market. At
September 30, 1999, exposure from these activities was not material to the
consolidated financial statements of the Company.
See Item 7 of the Company's report on Form 10-K for the year ended December
31, 1998.
- 46 -
Foreign Exchange Risk
The Company has foreign
exchange exposure to both the Spanish Pesetarates remained immaterial three- and the Argentine Peso. During the second quarter of 1999, the Company's
exposure to the Argentine Peso increased due to the acquisition of BAN.
However, management believes the Company's foreign exchange exposure to a
10% change in the Spanish Peseta and Argentine Peso would not have a
material effect on the financial position or results of operations.
As a result of acquiring CRC, the Company also has foreign exchange
exposure to the Canadian dollar and the British pound. Management believes
the Company's foreign exchange exposure to a 10% change in the either of
these currencies would not have a material effect on the financial position
or results of operations.
See Item 7 of the Company's report on Form 10-K for the yearsix-month periods ended December
31, 1998.June
30, 2000.
- 4737 -
Part II. Other Information
Item 1. Legal Proceedings.
For a description of the significant legal proceedings involving the
Company, LG&E and KU, reference is made to the information under the
following items and captions of (a) the Company's, LG&E's and KU's
respective combined Annual Report on Form 10-K for the year ended December
31, 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 and (b) the Company's, LG&E's and KU's respective
combined Quarterly ReportsReport on Form 10-Q for the quartersquarter ended March 31,
1999 and June 30, 1999:2000: Part III, Item 1, Legal Proceedings. Except as described herein, to
date, the proceedings reported in the Company's, LG&E's and KU's respective
combined Annual Report on Form 10-K's and Form 10-Q's10-K have not changed materially.
Certain Fuel Adjustment Clause ProceedingsPowergen Merger Regulatory Filings
On August 30, 1999,February 28, 2000, the Company announced the signing of a definitive
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 expected to be completed 9 to 12 months from
announcement, subject to receipt of required regulatory approvals and other
conditions to consummation. It is possible that the remaining regulatory
approvals may be received in time to permit a closing during the fourth
quarter of 2000 Applications for approval were filed with the Kentucky
Commission, the Virginia Commission and the FERC (under the Federal Power
Act) in March 2000, and with the SEC (under the Public ServiceUtility Holding
Company Act of 1935) in April 2000. Notice filings were made to the
Tennessee Regulatory Authority in the second quarter of 2000, to the
Department of Justice and the Federal Trade Commission (PSC) issued(under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act)) in July 2000
and as required under the "Exon-Florio" US Omnibus Trade and
Competitiveness Act of 1988 (the E-F Act) in August 2000. Powergen has
made standard filings with the United Kingdom Office of Fair Trading under
the Fair Trading Act of 1973, which implements a final order in these proceedings, agreeing with in part,voluntary regulatory
regime.
Through mid-August 2000, a number of approval steps have been completed by
the Company and denying in
part, the arguments outlined by KU in its rehearing petition. A net effectPowergen. Shareholders of the PSC's final order isCompany and of Powergen
approved the merger transaction in separate meetings held in June 2000.
Further, approvals were received from the Kentucky Commission in May 2000,
the FERC in June 2000 and the Virginia Commission in July 2000. The
parties submitted the requisite filings under the HSR Act and the E-F Act
in late July and early August 2000, respectively, which trigger 30 day
waiting periods due to reduceexpire in late August and early September,
respectively, absent any further inquiry or investigation by the refund obligation from $10.1
million, the original order amount, to $5.8 million.applicable
regulatory authority. The refund will be
implemented by KU from October 1999 to September 2000. Both KU and an
intervenor in the case have appealed the PSC final orderparties joint application for approval to the
Franklin
Circuit Court where a decision is anticipatedSEC under PUHCA was submitted in midApril 2000. While the Company and
Powergen believe that they will receive the requisite regulatory approvals
for the merger in sufficient time to late 2000.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 Note 12 of Notes to Financial Statements, in Item 3 above; Legal
Proceedings,1, Powergen Merger and Notes 5 andNote 22 to the
Company's and Note 3 of KU's
respective Notes to Financial Statements under Item 8 of the Company's and
KU's combinedits Annual Report
on Form 10-K for the year ended December 31, 1998,1999 for further discussion of
this matter.
Performance-Based Ratemaking
DuringGas Rate Increase Proceeding
In August and September 1999,2000, hearings were conductedheld before the PSC onKentucky Commission regarding
LG&E's March 2000 application for an general adjustment in gas rates. The
requested increase of approximately $26.4 million, the first major non-fuel-
related adjustment requested by LG&E
- 38 -
to gas rates in 10 years, is designed to reflect higher service and
distribution costs to natural gas customers. A final decision in the
matter is expected in late September 2000 from the Kentucky Commission,
whose decision may include possible changes to the amount of any approved
increases. An October 2000 effective date for the new rates has been
suspended.
Item 4. Submission of Matters to a Vote of Security Holders.
a) LG&E Energy's, LG&E's and KU's amended PBR plans. Initial briefsAnnual Meetings of Shareholders were
held on June 7, 2000.
b) Not applicable.
c) The matters voted upon and the results of the parties were
filedvoting at the Annual
Meetings are set forth below:
1. LG&E Energy:
i) The shareholders voted 85,066,839 common shares in favor of and
8,118,348 shares against the Merger Agreement and related transactions
with the PSCPowergen. Holders of 2,154,339 common shares abstained from
voting on October 7, 1999 and reply briefs were filed October
21, 1999. A decision from the PSC is expected by the end of the fourth
quarter of 1999 or in early 2000. See Note 8 of Notesthis matter.
ii) The shareholders voted to Financial
Statements of the Company,elect LG&E and KU contained in Item 1 of this Form 10-
Q and Item 3, Legal Proceedings,Energy's nominees for election to
the Company's,Board of Directors as follows:
William C. Ballard, Jr. - 106,760,854 common shares cast in favor of
election and 4,442,532 shares withheld.
T. Ballard Morton, Jr. - 106,719,738 common shares cast in favor of
election and 4,483,648 shares withheld.
William L. Rouse, Jr. - 106,617,016 common shares cast in favor of
election and 4,586,370 shares withheld.
Charles L. Shearer - 106,735,367 common shares cast in favor of
election and 4,468,019 shares withheld.
Holders of 3,725,775 common shares abstained from voting on this
matter.
iii) The shareholders voted 108,358,737 common shares in favor of and
1,440,846 shares against the approval of Arthur Andersen LLP as
independent auditors for 2000. Holders of 1,403,803 common shares
abstained from voting on this matter.
2. LG&E:
i) The shareholders voted to elect LG&E's nominees for election to the
Board of Directors as follows:
William C. Ballard, Jr. - 21,294,223 common shares and KU's combined
Annual Report582,318
preferred shares cast in favor of election and 17,408 preferred shares
withheld.
T. Ballard Morton, Jr. - 21,294,223 common shares and 586,296 preferred
shares cast in favor of election and 13,430 preferred shares withheld.
William L. Rouse, Jr. - 21,294,223 common shares and 586,105 preferred
shares cast in favor of election and 13,621 preferred shares withheld.
- 39 -
Charles L. Shearer - 21,294,223 common shares and 586,832 preferred
shares cast in favor of election and 12,894 preferred shares withheld.
Holders of no common or preferred shares abstained from voting on Form 10-K for further discussion of this
matter.
Oglethorpe Power Contract
Written submissions were filed by both parties during the third quarterii) The shareholders voted 21,294,223 common shares and 587,072 preferred
shares in the arbitration proceeding brought by LG&E Energy Marketing Inc. (LEM)
against Oglethorpe Power Corporation (OPC) regarding LEM's November 1996
power sales agreement with OPCfavor of and disputed load forecasts provided in
connection therewith. A hearing on the merits began on November 2, 1999,
and will end on November 19, 1999, with a final decision anticipated in mid
to late December 1999. While the Company anticipates a favorable outcome
in the proceeding, no assurances can be given as to such event. Should OPC
prevail, and as a result of higher than anticipated future commodity
prices, increased load demands, particularly at OPC, and other factors, the
Company may be required to increase its after-tax loss reserve by
approximately $150 million. Any such increase in the loss reserve will be
recorded in discontinued operations. This amount is subject to continuing
analysis and estimation. Management does not expect this to have a
material effect on income from continuing operations. See Note 2 in Notes
to Financial Statements under Item 1 above for a discussion of the
Company's discontinued operations and the reserve associated therewith.
- 48 -
Springfield Municipal Contract
Trial is currently scheduled for January 2000 in the action filed by LEM2,373 preferred shares against the Cityapproval of
Springfield, Illinois City Water, Light and Power
Company concerning the parties' 1997 Interchange Agreement. LEM has
estimated damages inArthur Andersen LLP as independent auditors for 2000. Holders of
10,281 preferred shares abstained from voting on this matter of approximately $21 million. See Item 3,
Legal Proceedings and Note 18matter.
3. KU:
i) The sole shareholder voted to elect KU's nominees for election to the
Company's Notes to Financial
Statements under Item 8, respectively,Board of the Company's Annual Report on
Form 10-KDirectors as follows:
37,817,878 common shares cast in favor of election and no shares
withheld for the year ended December 31, 1998 for further discussioneach of this matter.
Environmental Matters
On October 2, 1999, approximately 38,000 gallonsWilliam C. Ballard, Jr., T. Ballard Morton, Jr.,
William L. Rouse, Jr., and Charles L. Shearer, respectively.
ii) The sole shareholder voted 37,817,878 common shares in favor of diesel fuel leaked from
an underground pipeline at the E.W. Brown Station. Under the oversight of
EPA and state officials, KU commenced immediate spill containment and
recovery measures which prevented the spill from reaching the Kentucky
River. KU ultimately recovered approximately 34,000 gallons of diesel
fuel. On November 4, 1999, the Kentucky Division of Water issued a notice
of violation for the incident. KU has committed to undertake additional
mitigation measures and is currently negotiating a resolution of the state
regulatory aspects of this matter. To date, KU has incurred an estimated
$800,000 in remediation costs. KU is also investigating its possible
remediesno
shares against the manufacturerapproval of a cracked valve at issue in the spill.Arthur Andersen LLP as independent
auditors for 2000.
Holders of no common shares abstained from voting on these matters.
d) Not applicable.
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 JulyAugust 14, 1999,2000, the Company filed a report on Form 8-K announcingstating that on
July 28, 2000, it announced that it had acquired, effective July 8, 1999, CRC Holdings Corp., the parent
companyincreased its after-tax loss on
disposal of CRC-Evans Pipeline International, Inc. and related companies, a
provider of specialized equipment and services used in the construction and
rehabilitation of gas and oil transmission pipelines.discontinued operations by an additional $155 million.
- 4940 -
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: November 15, 1999August 14, 2000 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Louisville Gas and Electric Company
Registrant
Date: November 15, 1999August 14, 2000 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Kentucky Utilities Company
Registrant
Date: November 15, 1999August 14, 2000 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
- 5041 -