UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCHMarch 31, 2001
--------------2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission Registrant, State of Incorporation, IRS Employer
File Number Address, and Telephone Number Identification No.
- ----------- ----------------------------- ------------------
2-26720 LOUISVILLE GAS AND ELECTRIC COMPANY 61-0264150
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32010
Louisville, Ky. 40232
(502) 627-2000
1-3464 KENTUCKY UTILITIES COMPANYCommission Registrant, State of Incorporation, IRS Employer
File Number Address, and Telephone Number Identification No.
2-26720 Louisville Gas and Electric Company 61-0264150
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32010
Louisville, Ky. 40232
(502) 627-2000
1-3464 Kentucky Utilities Company 61-0247570
(A Kentucky and Virginia Corporation)
One Quality Street
Lexington, Kentucky 40507-1428
(859) 255-2100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes XX. No --- ---__.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Louisville Gas and Electric Company
-----------------------------------
21,294,223 shares, without par value, as of April 30, 2001,2002,
all held by LG&E Energy Corp.
Kentucky Utilities Company
--------------------------
37,817,878 shares, without par value, as of April 30, 2001,2002,
all held by LG&E Energy Corp.
This combined Form 10-Q is separately filed by Louisville Gas and Electric
Company and Kentucky Utilities Company. Information contained herein
related to any individual registrant is filed by such registrant on its own
behalf. Each registrant makes no representation as to information relating
to the other registrants.
TABLE OF CONTENTS
PART I
Item 1 Financial Statements
Louisville Gas and Electric Company and Subsidiary
Statements of Income................................................................ 1
Balance Sheets...................................................................... 2
Statements of Cash Flows............................................................ 4
Statements of Retained Earnings..................................................... 5
Statements of Comprehensive Income.................................................. 6
Kentucky Utilities Company and Subsidiary
Statements of Income................................................................ 7
Balance Sheets...................................................................... 8
Statements of Cash Flows............................................................ 10
Statements of Retained Earnings..................................................... 11
Statements of Comprehensive Income.................................................. 12
Notes to Financial Statements........................................................... 13
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition...................................................... 17
Item 3 Quantitative and Qualitative Disclosures About
Market Risk............................................................................. 21
PART II
Item 1 Legal Proceedings........................................................................... 22
Item 6 Exhibits and Reports on Form 8-K............................................................ 22
Signatures ............................................................................... 23
Item 1 Consolidated Financial Statements
Louisville Gas and Electric Company and Subsidiary
Statements of Income 1
Balance Sheets 2
Statements of Cash Flows 4
Statements of Retained Earnings 5
Statements of Other Comprehensive Income 6
Kentucky Utilities Company and Subsidiary
Statements of Income 7
Balance Sheets 8
Statements of Cash Flows 10
Statements of Retained Earnings 11
Statements of Other Comprehensive Income 12
Notes to Consolidated Financial Statements 13
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 25
PART II
Item 1 Legal Proceedings 26
Item 6 Exhibits and Reports on Form 8-K 26
Signatures 28
Part I. Financial Information - Item 1. Financial Statements
LOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARYLouisville Gas and Electric Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
2001 2000
---- ----
OPERATING REVENUES:
Electric (Note 8)....................................................................... $155,374 $161,326
Gas (Note 8)......................................................................... 157,897 88,316
-------- --------
Total operating revenues............................................................. 313,271 249,642
-------- --------
OPERATING EXPENSES:
Fuel for electric generation............................................................ 38,484 39,926
Power purchased......................................................................... 11,341 21,753
Gas supply expenses..................................................................... 125,237 63,394
Non-recurring charges (Note 4).......................................................... 144,385 8,141
Other operation expenses................................................................ 35,283 36,975
Maintenance............................................................................. 10,555 13,881
Depreciation and amortization........................................................... 25,267 24,149
Federal and state
income taxes......................................................................... (38,011) 9,668
Property and other taxes................................................................ 4,462 5,163
-------- --------
Total operating expenses............................................................. 357,003 223,050
-------- --------
NET OPERATING (LOSS) INCOME............................................................. (43,732) 26,592
Other income - net...................................................................... 996 1,519
Interest charges........................................................................ 11,379 10,690
-------- --------
NET (LOSS) INCOME....................................................................... (54,115) 17,421
Preferred stock dividends............................................................... 1,299 1,165
-------- --------
NET (LOSS) INCOME AVAILABLE
FOR COMMON STOCK.....................................................................Three Months
Ended
March 31,
2002 2001
OPERATING REVENUES:
Electric (Note 7) $166,246 $155,374
Gas(Note 7) 117,119 157,897
Total operating revenues 283,365 313,271
OPERATING EXPENSES:
Fuel for electric generation 44,107 38,484
Power purchased 23,581 11,341
Gas supply expenses 83,467 125,237
Non-recurring charges (Note 4) - 144,385
Other operation expenses 48,410 35,283
Maintenance 12,001 10,555
Depreciation and amortization 25,278 25,267
Federal and state
income taxes 13,237 (38,011)
Property and other taxes 4,536 4,462
Total operating expenses 254,617 357,003
NET OPERATING INCOME (LOSS) 28,748 (43,732)
Other income - net 1 996
Interest charges 7,806 11,379
NET INCOME (LOSS) 20,943 (54,115)
Preferred stock dividends 1,065 1,299
NET INCOME (LOSS) AVAILABLE
FOR COMMON STOCK $ 19,878 $(55,414) $ 16,256
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
1
LOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY-1-
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
(Unaudited)
Mar. 31, Dec. 31,
2001 2000
---- ----
UTILITY PLANT:
At original cost........................................................................ $3,246,026 $3,186,325
Less: reserve for depreciation......................................................... 1,315,833 1,296,865
---------- ----------
Net utility plant.................................................................... 1,930,193 1,889,460
---------- ----------
OTHER PROPERTY AND INVESTMENTS -
less reserve......................................................................... 1,188 1,357
---------- ----------
CURRENT ASSETS:
Cash ................................................................................. 6,995 2,495
Marketable securities................................................................... - 4,056
Accounts receivable - less reserve (Note 6)............................................. 89,724 170,852
Materials and supplies - at average cost:
Fuel (predominantly coal)............................................................ 16,860 9,325
Gas stored underground............................................................... 20,980 54,441
Other................................................................................ 30,823 31,685
Prepayments and other................................................................... 4,942 1,317
---------- ----------
Total current assets................................................................. 170,324 274,171
---------- ----------
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense................................................................ 5,709 5,784
Regulatory assets....................................................................... 34,849 36,808
Other ................................................................................. 48,792 18,504
---------- ----------
Total deferred debits and other assets............................................... 89,350 61,096
---------- ----------
Total assets............................................................................ $2,191,055 $2,226,084
========== ==========
Mar. 31, Dec. 31,
2002 2001
UTILITY PLANT:
At original cost $3,444,952 $3,423,037
Less: reserve for depreciation 1,404,277 1,381,874
Net utility plant 2,040,675 2,041,163
OTHER PROPERTY AND INVESTMENTS -
less reserve 1,356 1,176
CURRENT ASSETS:
Cash 16,082 2,112
Accounts receivable - less reserve (Note 6) 120,576 85,667
Materials and supplies - at average cost:
Fuel (predominantly coal) 28,715 22,024
Gas stored underground 15,278 46,395
Other 28,176 29,050
Prepayments and other 4,071 4,688
Total current assets 212,898 189,936
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,269 5,921
Regulatory assets (Note 8) 169,544 197,142
Other 13,686 13,016
Total deferred debits and other assets 188,499 216,079
Total assets $2,443,428 $2,448,354
The accompanying notes are an integral part of these consolidated financial
statements.
2
LOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY-2-
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
Mar. 31, Dec. 31,
2001 2000
---- ----
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares........................................................ $ 425,170 $ 425,170
Additional paid-in capital.............................................................. 40,000 40,000
Retained earnings....................................................................... 259,180 314,594
Other ................................................................................. (5,655) (836)
---------- ----------
Total common equity.................................................................. 718,695 778,928
Cumulative preferred stock.............................................................. 95,140 95,140
Long-term debt.......................................................................... 360,600 360,600
---------- ----------
Total capitalization................................................................. 1,174,435 1,234,668
---------- ----------
CURRENT LIABILITIES:
Current portion of long-term debt....................................................... 246,200 246,200
Notes payable........................................................................... 91,453 114,589
Accounts payable........................................................................ 106,214 136,892
Dividends declared...................................................................... 1,299 1,367
Accrued taxes........................................................................... 22,430 8,073
Accrued interest........................................................................ 4,720 6,350
Other ................................................................................. 16,235 15,826
---------- ----------
Total current liabilities............................................................ 488,551 529,297
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes................................................................................ 241,667 289,232
Investment tax credit, in
process of amortization.............................................................. 61,912 62,979
Accumulated provision for pensions
and related benefits (Note 4)........................................................ 127,894 31,257
Customer advances for construction...................................................... 9,489 9,578
Regulatory liabilities.................................................................. 52,359 55,152
Other ................................................................................. 34,748 13,921
---------- ----------
Total deferred credits and other liabilities......................................... 528,069 462,119
---------- ----------
Total capital and liabilities........................................................... $2,191,055 $2,226,084
========== ==========
Mar. 31, Dec. 31,
2002 2001
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Additional paid-in capital 40,000 40,000
Retained earnings 413,514 393,636
Accumulated other comprehensive income (18,994) (19,900)
Other (836) (836)
Total common equity 858,854 838,070
Cumulative preferred stock 95,140 95,140
Long-term debt (Note 10) 370,704 370,704
Total capitalization 1,324,698 1,303,914
CURRENT LIABILITIES:
Current portion of long-term debt 246,200 246,200
Notes payable to parent 122,553 94,197
Accounts payable 87,689 149,070
Dividends declared 1,065 1,111
Accrued taxes 38,451 20,257
Accrued interest 3,819 5,818
Other 11,708 11,729
Total current liabilities 511,485 528,382
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 299,366 298,143
Investment tax credit, in
process of amortization 57,635 58,689
Accumulated provision for pensions
and related benefits 168,043 167,526
Customer advances for construction 9,758 9,745
Regulatory liabilities (Note 8) 57,419 65,349
Other 15,024 16,606
Total deferred credits and other liabilities 607,245 616,058
Total capital and liabilities $2,443,428 $2,448,354
The accompanying notes are an integral part of these consolidated financial
statements.
3
LOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY-3-
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................................... $(54,115) $ 17,421
Items not requiring cash currently:
Depreciation and amortization........................................................ 25,267 24,149
Deferred income taxes - net.......................................................... (50,358) (3,498)
Investment tax credit - net.......................................................... (1,067) (1,071)
Other................................................................................ 5,074 1,677
Changes in net current assets and liabilities........................................... 86,749 5,399
Other ................................................................................. 79,455 4,156
--------- ---------
Net cash flows from operating activities............................................. 91,005 48,233
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities................................................................. - (124)
Proceeds from sales of securities....................................................... 4,225 -
Construction expenditures............................................................... (66,227) (21,269)
--------- ---------
Net cash flows from investing activities............................................. (62,002) (21,393)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings................................................................... (23,136) 11,694
Retirement of first mortgage bonds...................................................... - (20,000)
Payment of dividends.................................................................... (1,367) (24,236)
-------- ---------
Net cash flows from financing activities............................................. (24,503) (32,542)
--------- ---------
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS..................................................................... 4,500 (5,702)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD.................................................................. 2,495 54,761
-------- ---------
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD........................................................................ $ 6,995 $ 49,059
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid (received) during the period for:
Income taxes....................................................................... $ (4,226) $ 3,184
Interest on borrowed money.........................................................Three Months
Ended
Mar. 31,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 20,943 $ (54,115)
Items not requiring cash currently:
Depreciation and amortization 25,278 25,267
Deferred income taxes - net 290 (50,358)
Investment tax credit - net (1,054) (1,067)
Other 10,893 5,074
Changes in current assets and liabilities (32,199) 12,199
Changes in accounts receivable securitization-net
(Note 6) 22,000) 74,550
Other 9,775 79,455
Net cash flows from operating activities 11,926 91,005
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (180) -
Proceeds from sales of securities - 4,225
Construction expenditures (24,947) (66,227)
Net cash flows from investing activities (25,127) (62,002)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of pollution control bonds 119,926 -
Retirement of pollution control bonds (120,000) -
Short-term borrowings 58,300 -
Repayment of short-term borrowings (29,944) (23,136)
Payment of dividends (1,111) (1,367)
Net cash flows from financing activities 27,171 (24,503)
CHANGE IN CASH 13,970 4,500
CASH AT BEGINNING OF PERIOD 2,112 2,495
CASH AT END OF PERIOD $ 16,082 $ 6,995
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ - $ (4,226)
Interest on borrowed money 8,356 9,963 8,743
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
4
LOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY-4-
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
2001 2000
---- ----
Balance at beginning
of period............................................................................ $314,594 $259,231
Net (loss) income....................................................................... (54,115) 17,421
-------- --------
Subtotal............................................................................. 260,479 276,652
-------- --------
Cash dividends declared on stock:
5% cumulative preferred................................................................. 269 269
Auction rate cumulative
preferred............................................................................ 663 529
$5.875 cumulative preferred............................................................. 367 367
Common ................................................................................. - 16,500
-------- --------
Subtotal............................................................................. 1,299 17,665
-------- --------
Balance at end of period................................................................Three Months
Ended
March 31,
2002 2001
Balance at beginning
of period $393,636 $314,594
Net income (loss) 20,943 (54,115)
Subtotal 414,579 260,479
Cash dividends declared on stock:
5% cumulative preferred 269 269
Auction rate cumulative
preferred 429 663
$5.875 cumulative preferred 367 367
Subtotal 1,065 1,299
Balance at end of period $413,514 $259,180 $258,987
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
LOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY-5-
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
2001 2000
---- ----
Net (loss) income available for common stock............................................ $(55,414) $16,256
Cumulative effect of change in accounting principle -
Accounting for Derivative Instruments and
Hedging Activities (Note 5).......................................................... (5,998) -
(Losses) on Derivative Instruments and Hedging Activities
(Note 5)............................................................................... (2,035) -
Unrealized holding (losses) on
available-for-sale securities arising
during the period.................................................................... - (159)
-------- -------
Other comprehensive (loss),
before tax........................................................................... (8,033) (159)
Income tax benefit related to items
of other comprehensive (loss)........................................................ 3,213 64
-------- -------
Comprehensive (loss) income............................................................. $(60,234) $16,161
======== =======
Three Months
Ended
March 31,
2002 2001
Net income (loss) $20,943 $(54,115)
Cumulative effect of change in accounting principle -
Accounting For Derivative Instruments and
Hedging Activities (Note 5) - (5,998)
Gains (Losses) on derivative instruments
and hedging activities (Note 5) 1,509 (2,035)
Other comprehensive income (loss),
before tax 1,509 (8,033)
Income tax benefit (expense)
related to items of other
comprehensive income (loss) (603) 3,213
Other comprehensive income (loss) $ 21,849 $ (58,935)
The accompanying notes are an integral part of these consolidated financial
statements.
6
KENTUCKY UTILITIES COMPANY AND SUBSIDIARY-6-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
2001 2000
---- ----
OPERATING REVENUES (Note 8)............................................................. $211,793 $217,778
-------- --------
OPERATING EXPENSES:
Fuel for electric generation............................................................ 55,928 55,615
Power purchased......................................................................... 32,885 38,845
Non-recurring charges (Note 4).......................................................... 63,788 11,030
Other operation expenses................................................................ 26,618 28,848
Maintenance............................................................................. 11,970 14,150
Depreciation and amortization........................................................... 23,828 24,331
Federal and state
income taxes......................................................................... (6,450) 11,366
Property and other taxes................................................................ 4,155 4,840
-------- --------
Total operating expenses............................................................. 212,722 189,025
-------- --------
NET OPERATING (LOSS) INCOME............................................................. (929) 28,753
Other income - net...................................................................... 1,793 1,325
Interest charges........................................................................ 8,117 9,904
-------- --------
NET (LOSS) INCOME before Cumulative Effect of Accounting
Change............................................................................... (7,253) 20,174
Cumulative Effect of Change in Accounting for Derivative
Instruments and Hedging Activities, net of tax (Note 5).............................. 136 -
-------- --------
NET (LOSS) INCOME....................................................................... (7,117) 20,174
Preferred stock dividends............................................................... 564 564
-------- --------
NET (LOSS) INCOME AVAILABLE
FOR COMMON STOCK.....................................................................Three Months
Ended
March 31,
2002 2001
OPERATING REVENUES (Note 7) $215,168 $211,793
OPERATING EXPENSES:
Fuel for electric generation 58,271 55,928
Power purchased 41,060 32,885
Non-recurring charges (Note 4) - 63,788
Other operation expenses 34,522 26,618
Maintenance 11,559 11,970
Depreciation and amortization 23,059 23,828
Federal and state
income taxes 14,383 (6,450)
Property and other taxes 4,114 4,155
Total operating expenses 186,968 212,722
NET OPERATING INCOME (LOSS) 28,200 (929)
Other income - net 1,639 1,793
Interest charges (Note 5) 5,482 8,117
NET INCOME (LOSS)before Cumulative Effect
of Accounting Change 24,357 (7,253)
Cumulative Effect of Change in
Accounting for Derivative Instruments
and Hedging Activities, net of tax - 136
NET INCOME (LOSS) 24,357 (7,117)
Preferred stock dividends 564 564
NET INCOME (LOSS) AVAILABLE
FOR COMMON STOCK $ 23,793 $ (7,681) $ 19,610
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
KENTUCKY UTILITIES COMPANY AND SUBSIDIARY-7-
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
(Unaudited)
Mar. 31, Dec. 31,
2001 2000
---- ----
UTILITY PLANT:
At original cost........................................................................ $2,989,937 $2,932,763
Less: reserve for depreciation......................................................... 1,399,851 1,378,283
---------- ----------
Net utility plant.................................................................... 1,590,086 1,554,480
---------- ----------
OTHER PROPERTY AND INVESTMENTS -
less reserve......................................................................... 12,731 14,538
---------- ----------
CURRENT ASSETS:
Cash and temporary cash investments..................................................... 4,180 314
Accounts receivable - less reserve (Note 6)............................................. 52,485 90,419
Materials and supplies - at average cost:
Fuel (predominantly coal)............................................................ 27,022 12,495
Other................................................................................ 25,995 25,812
Prepayments and other................................................................... 6,190 1,899
---------- ----------
Total current assets................................................................. 115,872 130,939
---------- ----------
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense................................................................ 4,576 4,651
Regulatory assets....................................................................... 24,243 26,441
Other ................................................................................. 16,930 8,469
---------- ----------
Total deferred debits and other assets............................................... 45,749 39,561
---------- ----------
Total assets............................................................................ $1,764,438 $1,739,518
========== ==========
Mar. 31, Dec. 31,
2002 2001
UTILITY PLANT:
At original cost $3,087,542 $3,064,220
Less: reserve for depreciation 1,481,695 1,457,754
Net utility plant 1,605,847 1,606,466
OTHER PROPERTY AND INVESTMENTS -
less reserve 9,859 9,629
CURRENT ASSETS:
Cash and temporary cash investments 5,292 3,295
Accounts receivable - less reserve (Note 6) 79,070 45,291
Materials and supplies - at average cost:
Fuel (predominantly coal) 46,034 43,382
Other 26,729 26,188
Prepayments and other 6,057 4,942
Total current assets 163,182 123,098
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4,233 4,316
Regulatory assets (Note 8) 61,511 66,467
Other 15,701 16,926
Total deferred debits and other assets 81,445 87,709
Total assets $1,860,333 $1,826,902
The accompanying notes are an integral part of these consolidated financial
statements.
8
KENTUCKY UTILITIES COMPANY AND SUBSIDIARY-8-
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
Mar. 31, Dec. 31,
2001 2000
---- ----
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares........................................................ $ 308,140 $ 308,140
Additional paid-in capital.............................................................. 15,000 15,000
Retained earnings....................................................................... 339,557 347,238
Other ................................................................................. 994 (595)
---------- ----------
Total common equity.................................................................. 663,691 669,783
Cumulative preferred stock.............................................................. 40,000 40,000
Long-term debt.......................................................................... 432,496 430,830
---------- ----------
Total capitalization................................................................. 1,136,187 1,140,613
---------- ----------
CURRENT LIABILITIES:
Current portion of long-term debt....................................................... 54,000 54,000
Notes payable........................................................................... 46,190 61,239
Accounts payable........................................................................ 87,294 76,339
Dividends declared...................................................................... 188 188
Accrued taxes........................................................................... 38,534 19,622
Accrued interest........................................................................ 6,874 6,373
Other ................................................................................. 17,776 18,579
---------- ----------
Total current liabilities............................................................ 250,856 236,340
---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes................................................................................ 219,888 246,680
Investment tax credit, in
process of amortization.............................................................. 14,039 14,901
Accumulated provision for pensions
and related benefits (Note 4)........................................................ 87,862 47,495
Customers' advances for construction.................................................... 1,517 1,540
Regulatory liabilities.................................................................. 37,033 38,392
Other ................................................................................. 17,056 13,557
---------- ----------
Total deferred credits and other liabilities......................................... 377,395 362,565
---------- ----------
Total capital and liabilities........................................................... $1,764,438 $1,739,518
========== ==========
Mar. 31, Dec. 31,
2002 2001
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Additional paid-in capital 15,000 15,000
Retained earnings 434,689 410,896
Accumulated other comprehensive income 1,588 1,588
Other (595) (595)
Total common equity 758,822 735,029
Cumulative preferred stock 40,000 40,000
Long-term debt (Note 5) 432,892 434,506
Total capitalization 1,231,714 1,209,535
CURRENT LIABILITIES:
Current portion of long-term debt 54,000 54,000
Notes payable to parent 64,190 47,790
Accounts payable 64,132 85,149
Accrued taxes 36,249 20,520
Accrued interest 4,947 5,668
Other 16,458 16,482
Total current liabilities 239,976 229,609
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 237,723 239,204
Investment tax credit, in
process of amortization 10,716 11,455
Accumulated provision for pensions
and related benefits 91,824 91,235
Customer advances for construction 1,498 1,526
Regulatory liabilities (Note 8) 32,972 33,889
Other 13,910 10,449
Total deferred credits and other liabilities 388,643 387,758
Total capital and liabilities $1,860,333 $1,826,902
The accompanying notes are an integral part of these consolidated financial
statements.
9
KENTUCKY UTILITIES COMPANY AND SUBSIDIARY-9-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................................... $ (7,117) $ 20,174
Items not requiring cash currently:
Depreciation and amortization........................................................ 23,828 24,331
Deferred income taxes - net.......................................................... (28,166) (4,602)
Investment tax credit - net.......................................................... (862) (919)
Other................................................................................ 1,654 (911)
Changes in net current assets and liabilities........................................... 48,498 2,222
Other ................................................................................. 41,947 (2,804)
-------- ---------
Net cash flows from operating activities............................................. 79,782 37,491
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures............................................................... (60,302) (23,530)
-------- --------
Net cash flows from investing activities............................................. (60,302) (23,530)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings................................................................... 99,325 -
Repayment of short-term borrowings...................................................... (114,375) -
Payment of dividends.................................................................... (564) (19,564)
-------- --------
Net cash flows from financing activities............................................. (15,614) (19,564)
-------- --------
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS..................................................................... 3,866 (5,603)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD.................................................................. 314 6,793
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD........................................................................ $ 4,180 $ 1,190
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid (received) during the period for:
Income taxes....................................................................... $ 3,894 $ (9,260)
Interest on borrowed money.........................................................Three Months
Ended
March 31,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 24,357 $ (7,117)
Items not requiring cash currently:
Depreciation and amortization 23,059 23,828
Deferred income taxes - net (2,406) (28,166)
Investment tax credit - net (739) (862)
Other 1,233 1,654
Changes in current assets and liabilities (19,020) (1,502)
Changes in accounts receivable securitization-net
(Note 6) (25,100) 50,000
Other 8,388 41,947
Net cash flows from operating activities 9,772 79,782
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (23,611) (60,302)
Net cash flows from investing activities (23,611) (60,302)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings 174,869 99,325
Repayment of short-term borrowings (158,469) (114,375)
Payment of dividends (564) (564)
Net cash flows from financing activities 15,836 (15,614)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS 1,997 3,866
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 3,295 314
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 5,292 $ 4,180
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ - $ 3,894
Interest on borrowed money 6,101 7,116 6,560
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
10
KENTUCKY UTILITIES COMPANY AND SUBSIDIARY-10-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
2001 2000
---- ----
Balance at beginning
of period............................................................................ $347,238 $329,470
Net (loss) income....................................................................... (7,117) 20,174
-------- --------
Subtotal............................................................................. 340,121 349,644
-------- --------
Cash dividends declared on stock:
4.75% preferred......................................................................... 237 237
6.53% preferred......................................................................... 327 327
Common ................................................................................. - 25,000
-------- --------
Subtotal............................................................................. 564 25,564
-------- --------
Balance at end of period................................................................Three Months
Ended March 31,
2002 2001
Balance at beginning
of period $410,896 $347,238
Net income (loss) 24,357 (7,117)
Subtotal 435,253 340,121
Cash dividends declared on stock:
4.75% preferred 237 237
6.53% preferred 327 327
Subtotal 564 564
Balance at end of period $434,689 $339,557 $324,080
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
11
KENTUCKY UTILITIES COMPANY AND SUBSIDIARY-11-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months
Ended
Mar. 31,
2001 2000
---- ----
Net (loss) income available for common stock............................................ $(7,681) $19,610
Cumulative effect of change in accounting principle -
Accounting for Derivative Instruments and
Hedging Activities (Note 5).......................................................... 2,647 -
------- ------
Other comprehensive income,
before tax........................................................................... 2,647 -
Income tax (expense) related to items
of other comprehensive income........................................................ (1,059) -
-------- ------
Comprehensive (loss) income............................................................. $(6,093) $19,610
======== =======
Three Months
Ended
March 31,
2002 2001
Net income (loss) $24,357 $(7,117)
Cumulative effect of change in
accounting principle-Accounting
for Derivative Instruments and
Hedging activities (Note 5) - 2,647
Other comprehensive income, before tax - 2,647
Income tax (expense) related to items
of other comprehensive income - (1,059)
Other comprehensive income (loss) $24,357 $(5,529)
The accompanying notes are an integral part of these consolidated financial
statements.
12
LOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY
KENTUCKY UTILITIES COMPANY AND SUBSIDIARY-12-
Louisville Gas and Electric Company and Subsidiary
Kentucky Utilities Company and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. The unaudited consolidated financial statements include the accounts of
Louisville Gas and Electric Company and Subsidiary and Kentucky
Utilities Company and Subsidiary ("LG&E" and "KU" or the Companies)"Companies").
The common stock of each of LG&E and KU areis wholly owned subsidiaries ofby LG&E Energy
CorpCorp. ("LG&E Energy"). In the opinion of management, the unaudited
interim data includes all adjustments, including thoseconsisting only of a normal
recurring nature, have been made to present fairly theadjustments, necessary for a fair statement of consolidated
financial position, results of operations, comprehensive income and
cash flows for the periods indicated. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules and regulations, although
the Companies believe that the disclosures are adequate to make the
information presented not misleading.
See LG&E's and KU's Reports on Form 10-K for 20002001 for information
relevant to the accompanying financial statements, including
information as to the significant accounting policies of the Companies.
2. EffectiveOn December 11, 2000, LG&E Energy Corp. was acquired by Powergen plc
("Powergen"). LG&E Energy had announced on February 28, 2000 that its
Board of Directors accepted the offer to be acquired by Powergen
for cash of approximately $3.2 billion or $24.85 per share and the
assumption of all of LG&E Energy's debt. Pursuant toAs a result of the acquisition, agreement,
among other things, LG&E Energy became a wholly ownedwholly-owned indirect subsidiary
of Powergen and, as a result, LG&E and KU became indirect subsidiaries of
Powergen. The utility operations (LG&E and KU) of LG&E Energy have
continued their separate identities and continue to serve customers in
Kentucky and Virginia under their existing names. The preferred stock and
debt securities of the utility operations were not affected by this
transaction andresulting in the utilitiesutility operations' obligations to continue to
file SEC reports. Following the acquisition, Powergen became a registered
holding company under the Public Utility Holding Company Act of 1935 ("PUHCA")(PUHCA), and
LG&E and KU, as subsidiaries of a registered holding company, became
subject to additional regulation under PUHCA.
As a result of the Powergen acquisition and in order to comply with
PUHCA, LG&E Energy Services Inc. ("LG&E Services") was formed and
became operational on January 1, 2001. LG&E Services provides certain
services to affiliated entities, including LG&E and KU, at cost, as
required under PUHCA. On January 1, 2001, approximately 1,000
employees, mainlyprimarily from LG&E Energy, LG&E and KU, were moved to LG&E
Services.
3. On April 9, 2001, Germany's largesta German power company, E.ON AG ("E.ON"), announced
a pre-conditional cash offer of (pound)5.1 billion pounds sterling ($7.3 billion)
for Powergen. The offer is subject to a number of conditions, including the
receipt of certain European and United States regulatory approvals. The
Kentucky Public Service Commission ("Kentucky Commission"), the Federal
Regulatory Energy Commission ("FERC"), the Virginia State Corporation
Commission, and the Tennessee Regulatory Authority have all approved the
acquisition of Powergen and LG&E Energy by E.ON. The parties expect to
obtain the necessaryremaining regulatory approvals by earlyduring the first half of 2002
and they expect to complete the transaction during this time frame.
On April 19, 2002, Powergen plc shareholders voted in favor of the
springacquisition of 2002. See
Powergen's schedule 14D-9 and associated schedulesPowergen by E.ON. The vote in favor of such resolutions
enables the deal to such filing, filed
with the Securities and Exchange Commission on April 9, 2001.proceed by way of a scheme of arrangement. Such
procedure is anticipated to allow E.ON to obtain full equity in
Powergen upon completion.
-13-
4. During the first quarter 2001, the Companies tookLG&E recorded a $124.1$144 million after
tax charge (LG&E $86.1 million, and
KU $38 million)recorded a $64 million charge for a workforce reduction program.
Primary components of the chargescharge were separation benefits, enhanced
early retirement benefits, and health care benefits. The result of
this workforce reduction was the elimination of approximately 950over 1,100 positions,
most of which were taken by employeesaccomplished primarily through the Companies'a voluntary enhanced severance program.
During the first
quarter 2000,
13
the Companies' took an $11.4 million after-tax charge for the
continued integration of the operations ofOn June 1, 2001, LG&E and KU including their
customer service centersfiled an application (VDT case) with the
Kentucky Commission to create a regulatory asset relating to these
first quarter 2001 charges. The application requested permission to
amortize these costs over a four-year period. The Kentucky Commission
also opened a case to review the new depreciation study and their retail electricresulting
depreciation rates implemented in 2001.
LG&E and gas operations.KU reached a settlement in the VDT case as well as the other
cases involving depreciation rates and the Earnings Sharing Mechanism
with all intervening parties. The resultsettlement agreement was approved by
the Kentucky Commission on December 3, 2001.
The Kentucky Commission December 3, 2001 order allowed LG&E to set up
a regulatory asset of this consolidation was$141 million for the eliminationworkforce reduction costs
and begin amortizing these costs over a five year period starting in
April 2001. The first quarter charge of approximately
400 positions most of which were taken by$144 million represented all
employees through the
Companies'who had accepted a voluntary enhanced severance program.
Between the time of the original filing and the December 3, 2001 order,
some employees rescinded their participation in the voluntary enhanced
severance program, thereby decreasing the original charge from $144
million to $141 million. The settlement will also reduce revenues by
approximately $26 million through a surcredit on future bills to
customers over the same five year period. The surcredit represents
stipulated net savings LG&E is expected to realize from implementation
of best practices through the value delivery process. The agreement
also established LG&E's new depreciation rates in effect retroactive to
January 1, 2001. The new depreciation rates decreased depreciation
expense by $5.6 million in 2001.
The Kentucky Commission December 3, 2001, order allowed KU to set up a
regulatory asset of $54 million for the workforce reduction costs and begin
amortizing these costs over a five year period starting in April 2001. The
first quarter charge of $64 million represented all employees who had
accepted a voluntary enhanced severance program. Some employees rescinded
their participation in the voluntary enhanced severance program and, along
with the non-recurring charge of $6.9 million for FERC and Virginia
jurisdictions, thereby decreasing the original charge from $64 million to
$54 million. The settlement will also reduce revenues by approximately $11
million through a surcredit on future bills to customers over the same five
year period. The surcredit represents stipulated net savings KU is
expected to realize from implementation of best practices through the value
delivery process. The agreement also established KU's new depreciation
rates in effect December 2001, retroactive to January 1, 2001. The new
depreciation rates decreased depreciation expense by $6.0 million in 2001.
5. SFASStatement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES,Accounting for
Derivative Instruments and Hedging Activities, establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on
the balance sheet as either an asset or a liability measured at its fair
value. SFAS No. 133 requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item
in the income statement, and requires that LG&E and KU must formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting. SFAS No. 133 could increase the volatility in
earnings and other comprehensive income. SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES -- DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO. 133, deferred
the effective date of SFAS No. 133 until January 1, 2001. LG&E and KU adopted SFAS No. 133
-14-
on January 1, 2001. The effect of adopting this statement wasin 2001 resulted
in a charge to LG&E of $3.6 million and(net of tax of $2.4 million) decrease in other
comprehensive income from a credit to KU of $1.6 million to cumulative effect of change in accounting
principle for LG&E and a $1.6 million (net of tax)tax of $1.1 million) increase
in other comprehensive income.income from a cumulative effect of change in
accounting principle for KU.
The companiesCompanies use interest rate swaps to hedge exposure to market
fluctuations in certain of itstheir debt instruments. Pursuant to companyCompany
policy, use of these financial instruments is intended to mitigate risk
and earnings volatility and areis not speculative in nature. Management
has designated all of the companies'Companies' interest rate swaps as hedge
instruments. Financial instruments designated as cash flow hedges have
resulting gains and losses recorded within other comprehensive income
and stockholders' equity. To the extent a financial instrument or the
underlying item being hedged is prematurely terminated or the hedge
becomes ineffective, the resulting gains or losses are reclassified
from other comprehensive income to net income. Financial instruments
designated as fair value hedges are periodically marked-to-marketmarked to market with
the resulting gains and losses recorded directly into net income to
correspond with income or expense recognized from changes in market
value of the items being hedged.
As of March 31, 2001,2002, LG&E had fixed rate swaps covering $217,335,000$117,335,000
in notional amounts of variable rate debt and with fixed rates ranging
from 3.560%4.184% to 5.495%. The average variable rate on the debt during
the quarter was 4.44%1.41%. The swaps have been designated as cash flow
hedges and expire on various dates from September 20012003 through November
2020. During
the quarter ended March 31, 2001, theThe hedges were deemed to be fully effective resulting in pretax
chargesgain for the quarter ended March 31, 2002 of $2,035,000$1.5 million, recorded in
other
comprehensive income.Other Comprehensive Income. Upon expiration of these hedges, the amount
recorded in Other Comprehensive Income will be reclassified into
earnings. The amount expected to be reclassified from Other
Comprehensive Income to earnings in the next twelve months is
immaterial.
As of March 31, 2001,2002, KU had variable rate swaps covering
$153,000,000 in notional amounts of fixed rate debt. The average
variable rate on these swaps during the quarter was 5.61%2.42%. The
underlying debt has fixed rates ranging from 5.873%5.75% to 7.920%7.92%. The swaps
have been designated as fair value hedges and expire on various dates
from May 2007 through June 2025. During the quarter ended March 31,
2001,2002, the effect of marking these financial instruments and the
underlying debt to market resulted in pretax gains of $1,463,000$1.8 million,
recorded as a reduction in interest expense.
6. SFAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND EXTINGUISHMENTS OF LIABILITIES,Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, revises the standards for
accounting for securitizations and other transfers of financial assets
and collateral and requires certain disclosures, and provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The Companies
adopted SFAS No. 14
140 in the first quarter of 2001, when LG&E and KU
entered into an accounts receivable securitization transaction.
On February 6, 2001, LG&E and KU eachimplemented an accounts receivable
securitization program. The purpose of this program is to enable the
utilities to accelerate the receipt of cash from the collection of
retail accounts receivable, thereby reducing dependence upon more
costly sources of working capital. The securitization program allows
for a percentage of eligible receivables to be sold. Eligible
receivables are generally all receivables associated with retail sales
that have standard terms and are not past due. LG&E and KU are able to
terminate these programs at any time without penalty. If there is a
significant deterioration in the payment record of the receivables by
retail customers or if the Companies fail to meet certain covenants of
the program, the program may terminate at the election of the financial
institutions. In this case, payments from retail customers would first
-15-
be used to repay the financial institutions participating in the
program, and would then be available for use by the Companies.
As part of the program, LG&E and KU sold retail accounts receivables to
two
wholly-ownedwholly owned subsidiaries, LG&E Receivables LLC (LGE-R)("LG&E R") and KU
Receivables LLC (KU-R), respectively.("KU R"). Simultaneously, LGE-RLG&E R and KU-RKU R entered into
two separate three-year accounts receivablesreceivable securitization facilities
with two financial institutions and their affiliates whereby LGE-RLG&E R and
KU-RKU R can sell, on a revolving basis, an undivided interest in certain
of their receivables and receive up to $75 million and $50 million,
respectively, from an unrelated third party purchaser at apurchaser. The effective
cost of funds linkedthe receivables programs is comparable to LG&E and KU's lowest
cost source of capital, and is based on prime rated commercial paper rates plus a charge for
administrative and credit support services. Furthermore,paper.
LG&E and KU retain the servicing rights of the sold receivables through
two separate servicing agreements betweenwith the third party purchaser and each utility.
Under these agreements,purchasers. LG&E
and KU receive a fee for servicing the sold
receivables on behalfhave obtained opinions from independent legal counsel indicating
these transactions qualify as true sales of the third party purchaser.receivables. As of March
31, 2002 and December 31, 2001, LG&E's outstanding program balance was
$75$20.0 million and $42.0 million, respectively, and KU's balance at
March 31, 2002 and December 31, 2001 was $50 million.$20.0 million and $45.1
million, respectively.
Management expects to renew these facilities when they expire.
The allowance for doubtful accounts associated with the eligible
securitized receivables was $1$1.6 million and $1.3 million for LG&E and $.4$0.5
million and $0.5 million for KU at March 31, 2001.2002 and December 31, 2001,
respectively. Charge offs were immaterial for LG&E and KU. The risk of
uncollectibility associated with the sold receivables is minimal.
Through
March 31, approximately .15%, or $698,000, of total receivables for LG&E
and KU were uncollectible. Moreover, each securitization facility contains a fully funded reserve for
uncollectible receivables.
7. In October 2000, LG&E and KU each filed an application with the
Kentucky Public Service Commission ("Kentucky Commission") to amend its
Environmental Compliance Plan to reflect the addition of Nitrogen Oxide
(NOx) reduction technology projects and to amend its Environmental Cost
Recovery Tariff (ECR) to include an overall rate of return on capital
investments. The NOx reduction technology will allow LG&E and KU to meet
new Environmental Protection Agency NOx requirements that take effect in
2003-2004. The Kentucky Commission issued an order on April 18, 2001 that
approved the amended environmental compliance plan and the use of an
overall rate of return, including an 11.5% return on equity, effective
May 1, 2001. Costs associated with the amended compliance plan may be
recovered by the Companies as incurred, subject to review and approval by
the Kentucky Commission in periodic regulatory reviews.
8. External and intersegment revenues (related parties transactions
between LG&E and KU) and income from continuing operationsby business segment for the three
months ended March 31, 2002, follow (in thousands of $):
-16-
Net
Income/
(Loss)
Inter- Avail.
External segment For-
Revenues Revenues Common
LG&E electric $ 153,193 $ 13,053 $ 10,178
LG&E gas 117,119 - 9,700
Total $ 270,312 $ 13,053 $ 19,878
KU electric $ 200,387 $ 14,781 $ 23,793
External and intersegment revenues (related parties transactions
between LG&E and KU) and income by business segment for the three
months ended March 31, 2001, follow:
follow (in thousands of $):
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common
LG&E electric $148,361 $ 7,013 $ (44,443)
LG&E gas 157,897 - (10,971)
-------- -------- --------
Total $306,258 $ 7,013 $(55,414)
======== ======== ========
KU electric $206,111 $ 5,682 $ (7,681)
======== ======== ========
External segment For
Revenues Revenues Common
LG&E electric $ 148,361 $ 7,013 $ (44,443)
LG&E gas 157,897 - (10,971)
Total $ 306,258 $ 7,013 $ (55,414)
KU electric $ 206,111 $ 5,682 $ (7,681)
8. The following regulatory assets and intersegment revenuesliabilities were included in the
balance sheet of LG&E and KU as of March 31, 2002 and December 31, 2001
(in thousands of $):
Louisville Gas and Electric
(Unaudited)
Mar. 31, Dec. 31,
2002 2001
REGULATORY ASSETS:
VDT costs $ 120,029 $ 127,529
Unamortized loss on bonds 18,262 17,902
Gas supply adjustments due from customers 13,772 30,135
LG&E/KU merger costs 4,537 5,444
One utility costs 2,971 3,643
Manufactured gas sites 1,987 2,062
Other 7,986 10,427
Total 169,544 197,142
REGULATORY LIABILITIES:
Deferred income from continuingtaxes - net 47,770 48,703
Gas supply adjustments due to customers 8,879 15,702
Other 770 944
Total $ 57,419 $ 65,349
-17-
Kentucky Utilities
(Unaudited)
Mar. 31, Dec. 31,
2002 2001
REGULATORY ASSETS:
VDT costs $ 45,936 $ 48,811
Unamortized loss on bonds 5,925 6,142
LG&E/KU merger costs 5,116 6,139
One utility costs 3,492 4,365
Other 1,042 1,010
Total 61,511 66,467
REGULATORY LIABILITIES:
Deferred income taxes - net 31,947 32,872
Other 1,025 1,017
Total $ 32,972 $ 33,889
9. Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets were
issued in the second quarter of 2001. SFAS No. 141 requires all
business combinations initiated after June 30, 2001, to be accounted
for using the purchase method. SFAS No. 142 requires goodwill to be
recorded, but not amortized. Further, goodwill will now be subject to a
periodic assessment for impairment. LG&E and KU have no recorded
goodwill and have no merger or acquisitions in progress. Accordingly,
the provisions of these new pronouncements were effective July 1, 2001,
for LG&E and KU. The Companies experienced no impact on financial
position or results of operations by business segmentas a result of adopting these
standards.
SFAS No. 143, Accounting for Asset Retirement Obligations and SFAS No.
144, Accounting for the three months ended March 31, 2000, follow:
15
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common
LG&E electric $155,119 $ 6,207 $ 16,305
LG&E gas 88,316 - (49)
-------- -------- --------
Total $243,435 $ 6,207 $ 16,256
======== ======== ========
KU electric $210,771 $ 7,007 $ 19,610
======== ======== ========--
9. Reference is made to Part II, Legal Proceedings, belowImpairment or Disposal of Long-Lived Assets,
were also issued during 2001. SFAS No. 143 establishes accounting and
Part I, Item
3, Legal Proceedings,reporting standards for obligations associated with the retirement of
LG&E'stangible long-lived assets and KU's Annual Reports on Form 10-Kthe associated asset retirement costs.
SFAS No. 144 supersedes SFAS No. 121, Accounting for the year ended December 31, 2000.
16Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and the
accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS No. 144, among other
provisions, eliminates the requirement of SFAS No. 121 to allocate
goodwill to long-lived assets to be tested for impairment. The
effective implementation date as it relates to the Companies for SFAS
No. 144 is January 1, 2002 and SFAS No. 143 is January 1, 2003. SFAS
No. 144 had no current impact on the financial position or results of
operations of LG&E or KU. Management has not determined what impact
SFAS No. 143 will have on the financial position or results of
operations of the Companies.
The Financial Accounting Standards Board created the Derivatives
Implementation Group ("DIG") to provide guidance for implementation of
SFAS No. 133. DIG Issue C15, Normal Purchases and Normal Sales
Exception for Option Type Contracts and Forward Contracts in
Electricity was adopted in 2001 and had no impact on results of
operations and financial position. DIG Issue C16, Applying the Normal
Purchase and Normal Sales Exception to Contracts that Combine a Forward
Contract and a Purchased Option Contract, was cleared in the third
quarter 2001 and stated that option contracts do not meet the normal
purchases and normal sales exception and should follow SFAS No. 133.
-18-
DIG Issue C16 will be effective in the second quarter of 2002. The
Companies have reviewed their contracts for options and determined that
DIG Issue C16 does apply, but the adoption of DIG Issue C16 will not
have a material impact on the financial position or results of
operations of the Companies pursuant to regulatory treatment prescribed
by SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation.
10.On March 22, 2002, LG&E refinanced two $35 million unsecured pollution
control bonds due November 1, 2027. The replacement variable rate
bonds are secured by first mortgage bonds and will mature November 1,
2027. The variable rate will be established by the remarketing agent
taking into account market conditions in the commercial paper market.
On March 6, 2002, LG&E refinanced $22.5 million and $27.5 million in
unsecured pollution control bonds, both due September 1, 2026. The
replacement bonds, due September 1, 2026, are variable rate bonds and
are secured by first mortgage bonds. The variable rate will be
established by the remarketing agent taking into account market
conditions in the commercial paper market.
11.In the normal course of business, lawsuits, claims, environmental
actions, and various non-ratemaking governmental proceedings arise
against LG&E and KU. To the extent that damages are assessed in any of
these lawsuits, LG&E and KU believe that their insurance coverage is
adequate. Management, after consultation with legal counsel, does not
anticipate that liabilities arising out of other currently pending or
threatened lawsuits and claims of the type referenced above will have a
material adverse effect on LG&E's or KU's consolidated financial
position or results of operations, respectively.
-19-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations and
Financial Condition.
GENERALOperations.
General
The following discussion and analysis by management focuses on those
factors that had a material effect on LG&E's and KU's financial results of
operations and financial condition during 2001the three month period ended
March 31, 2002 and should be read in connection with the financial
statements and notes thereto.
Some of the following discussion may contain forward-looking statements
that are subject to certain risks, uncertainties and assumptions. Such
forward-looking statements are intended to be identified in this document
by the words "anticipate," "expect," "estimate," "objective," "possible,"
"potential" and similar expressions. Actual results may vary materially.
Factors that could cause actual results to differ materially include:
general economic conditions; business and competitive conditions in the
energy industry; changes in federal or state legislation; unusual weather;
actions by state or federal regulatory agencies; and other factors
described from time to time in LG&E's and KU's reports to the Securities
and Exchange Commission, including Exhibit No. 99.01 to the report on Form
10-K for year ended December 31, 2000.
RESULTS OF OPERATIONS2001.
Results of Operations
The results of operations for LG&E and KU 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 MARCHThree Months Ended March 31, 2002, Compared to
Three Months Ended March 31, 2001
COMPARED TO
THREE MONTHS ENDED MARCH 31, 2000
LG&E RESULTS:Results:
LG&E's net income decreased $71.5increased $75.1 million for the quarter ended March 31,
2001,2002, as compared to the quarter ended March 31, 2000,2001, primarily because of
a non-recurring charge of $86.1 million, net of tax, one-time charge for LG&E's workforce
reduction program. These
expenses were partially offset by a $4.8 million net of taxprogram incurred in 2001. Excluding this one-time charge,
incurred in the first quarter of 2000 for LG&E's One-Utility Program. See Note 4
of Notes to Financial Statements. Excluding these one-time charges, LG&E's
net income would have increased $9.8decreased $11.0 million primarily due to increased gas sales to
retail consumersamortization
expenses associated with LG&E's workforce reduction program and lower operationshigher
pension and maintenance expenses.fuel costs.
A comparison of LG&E's revenues for the quarter ended March 31, 2001,2002, with
the quarter ended March 31, 2000, (excluding the reversal of a Fuel Adjustment
Clause ("FAC") refund of $1.1 million which was offset by an additional accrual
for performance-based ratemaking of $.3 million in 2000),2001, reflects increases and (decreases) which
have been segregated by the following principal causes (thousands(in thousands of $):
17Electric Gas
Cause Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ (698)$ (40,932)
Environmental cost recovery surcharge 1,646 -
Demand side management cost recovery 52 422
LG&E/KU merger surcredit (204) -
Value delivery surcredit (237) (122)
Variation in sales volume, etc. (2,341) (10,296)
Total retail sales (1,782) (50,928)
Wholesale sales 13,101 10,022
Gas transportation - net - 189
Other (447) (61)
Total $ 10,872 $ (40,778)
Electric Gas
Cause Revenues Revenues
- ----- -------- ---------
Retail sales:
Fuel and gas supply adjustments...................................................... $ 1,939 $64,815
Merger surcredit..................................................................... (834) -
Performance based rate............................................................... 1,179 -
Environmental cost recovery surcharge................................................ (58) -
Gas rate increase.................................................................... - 7,609
Weather normalization................................................................ - (2,194)
Electric rate reduction.............................................................. (3,671) -
Variation in sales volume, etc....................................................... 5,031 6,815
------- -------
Total retail sales................................................................... 3,586 77,045
Wholesale sales......................................................................... (9,073) (7,406)
Gas transportation - net................................................................ - (395)
Other ................................................................................. 378 337
------- -------
Total ................................................................................. $(5,109) $69,581
======= =======
-20-
Electric revenues increased primarily because of an increase in wholesale
sales volumes ($27.6 million) partially offset by a decrease in wholesale
sales prices ($14.5 million). Gas revenues decreased primarily as a result
of lower gas supply costs billed to customers through the gas supply clause
and decreased volumes sold in the first quarter of 2002 due to an 18%
decrease in heating-degree days.
Fuel for electric generation and gas supply expenses comprise a large
componentportion of LG&E's total operating expenses. LG&E's electric and gas rates
contain a fuel adjustment clause and a gas supply clause, respectively,
whereby increases or decreases in the cost of fuel and gas supply may be
reflected in retail rates, subject to the approval of the Kentucky
Commission. Fuel for electric generation decreased $1.4increased $5.6 million (4%(15%) for
the quarter because of a decreasean increase in volume of generation ($2.43.2 million), partially offset by a higher
and an increase in the cost of coal burned ($12.4 million). Gas supply
expenses increased $61.8decreased $41.8 million (98%(33%) due to increasesa decrease in net gas supply
cost ($58.536.4 million), and increasesa decrease in the volume of retail gas delivered
to the distribution system ($3.313.6 million), partially offset by increased
wholesale gas expenses ($8.2 million).
Power Purchased decreased $10.4purchased increased $12.2 million (48%(108%) primarily because of an
increase in 2001 primarily duevolume of purchases to decreased
brokeredsupport increased wholesale sales activity($14
million) partially offset by a decrease in the wholesale electric market.cost of power purchased ($1.8
million).
The increasedecrease in non-recurring charges of $136.2$144.4 million, $81.2$86.1 million
after tax is due to the costs associated with LG&E's workforce reduction
initiatives.
Seeinitiative. (See Note 4 of Notes to Financial Statements.4).
Other operationoperations expenses decreased $1.7increased $13.1 million (5%(37%) in 2002, as
compared to 2000. This
decrease resulted from decreased steam power production expenses ($2.3 million),
partially offset by increased administrative and general expenses, ($.6
million).
Maintenance expenses decreased $3.3 million (24%) in 2001, primarily due to decreases in steam production maintenance ofamortization expenses associated with
LG&E's workforce reduction program ($1.57.5 million), higher pension expenses
($2.7 million), and software and
communication equipment maintenance,higher costs for electric transmission ($1.61.7 million).
Depreciation and amortizationMaintenance expenses increased $1.1 million (5%) due to an increase
in depreciable plant in service and higher depreciation rates. A depreciation
study was completed in late 2000 with new depreciation rates going into
effect in the first quarter 2001. The new rates, as compared to rates in
effect for 2000, are expected to increase LG&E's depreciation expense by
about $.9 million in 2001.
Property and other taxes decreased $.7$1.4 million (14%) in 20012002 primarily due to
decreasesincreased repairs to steam production ($0.9 million) and maintenance to
electric distribution plant ($0.3 million).
Other income-net decreased $1 million (100%) in 18
payroll taxes as2002 primarily due to
increases in repairs to non-utility property($0.5 million), and a resultdecrease
in gains recorded on the sale of lower employee head count in conjunction with
LG&E's workforce reductions.non-utility property ($0.4 million).
Variations in income tax expense are largely attributable to changes in pretax
income.
Other income - net, decreased $.5 million (34%) in 2001 primarily due to
decreases in the gain on sale of non-utility property, and lower interestpre-
tax income.
Interest charges increased $.7decreased $3.6 million (6%(31%) in 2001 primarily due to increasedlower interest expenserates
on variable rate long term debt ($2.0 million), a decrease in interest on
debt to parent company ($0.6 million) and a decrease in interest associated
with LG&E's accounts receivable securitization program ($1.6 million), partially offset by a decrease in interest on notes
payable ($1.1 million).
-21-
KU RESULTS:Results:
KU's net income decreased $27.3increased $31.5 million for the quarter ended March 31,
2001,2002, as compared to the quarter ended March 31, 2000.2001. The decreaseincrease was
mainlyprimarily due to a non-recurring charge of $38$38.0 million, net of tax, made
in the first quarter of 2001 for costs associated with the KUKU's workforce
reduction program. These
expenses were partially offset by a $6.6 million non-recurring net of taxExcluding this one-time charge,
in the same period in 2000 for KU's One Utility Program. See Note 4 of Notes to
Financial Statements. Excluding these one-time charges, net income increased
$4.1decreased
$6.5 million, due largely to decreasedincreased operations and maintenancepurchased power
expense, partially offset by decreased interest expense.
A comparison of KU's revenues for the quarter ended March 31, 2001,2002, with
the quarter ended March 31, 2000,2001, reflects increases and (decreases) which
have been segregated by the following principal causes (thousands(in thousands of $):
Sales to ultimate consumers:
Fuel clause adjustments.............................................................. $ 2,404
Environmental cost recovery surcharge................................................ (729)
Performance based rate .............................................................. 893
Merger surcredit..................................................................... (1,089)
Electric rate reduction.............................................................. (5,395)
Variation in sales volume, etc....................................................... 6,513
------
Total retail sales................................................................... 2,597
Wholesale sales......................................................................... (9,082)
Other ................................................................................. 500
---------
Total ................................................................................. $ (5,985)
==========
Retail sales:
Fuel supply adjustments $ 5,133
Environmental cost recovery surcharge 1,510
Demand side management cost recovery 784
LG&E/KU merger surcredit (1,025)
Value delivery surcredit (189)
Variation in sales volume, etc. (3,814)
Total retail sales 2,399
Wholesale sales (305)
Other 1,281
Total $ 3,375
Electric revenues increased primarily due to increased price of sales to
retail customers.
Fuel for electric generation comprises a large segmentportion of KU's total
operating expenses. KU's electric rates contain a FAC,Fuel Adjustment Clause,
whereby increases or decreases in the cost of fuel are reflected in retail
rates, subject to the approval of the Kentucky Public Service Commission,
the Virginia State Corporation Commission, and the Federal Energy
Regulatory Commission. Fuel for electric generation increased $.3$2.3 million
(4%) for the first quarter of 2001
as compareddue to the first quarter of 2000, with a $2.1$5.3 million increase due to
higherin the cost of coal
burned partially offset by a $1.8decrease of $3.0 million decrease in volume burned.
Power purchased decreased $6increased $8.2 million (15%(25%) in 20012002 primarily due to decreased
brokered sales activitiesbecause of
an increase in the wholesale electric market.volumes purchased ($11.6 million) partially offset by a
decrease in price ($3.4 million).
Non-recurring charges increased $52.8decreased $63.8 million, $31.4$38.0 million after tax.
These costs arewere due to KU's workforce reduction program. See(See Note 4 of Notes to
Financial Statements.
19
4).
Other operatingoperations expenses decreased by $2.2increased $7.9 million (8%(30%). The decrease was
primarily attributable to decreased customer accounting and service and
marketing expense ($3.4 million) and steam, transmission and distribution ($.2
million) partially offset by an increase in administrative and general expenses
($1.4 million).
Maintenance expenses decreased by $2.2 million (15%) due to decreased
maintenance at the steam generating plants ($.9 million), the distribution
system ($.6 million), and the general plant ($.6 million).
Depreciation and amortization decreased $.5 million (2%) due to a decrease in
depreciation rates. A depreciation study was completed in late 2000 with new
depreciation rates going into effect in the first quarter 2001. The new rates, as compared to rates in effect for 2000, are expected to decrease KU's
depreciation expense by about $6 million in 2001.
Property and other taxes decreased $.7 million (14%) in 2001,
primarily due to decreases in payroll taxes as a result ofamortization expenses associated with KU's workforce
reductions.reduction program ($2.9 million), higher pension expenses ($1.2 million),
higher costs for electric transmission ($1.4 million) and increases in
uncollectible accounts and customer assistance programs ($1.9 million).
Variations in income tax expense are largely attributable to changes in
pretax income.
Other income- net, increased $.5 million in 2001 due to a decrease in other
income expenses.
Interest charges decreased $1.8$2.6 million (18%(32%) for the first quarter 20012002 as
compared to the first quarter 20002001 due to implementation of SFAS 133, Accounting for
Derivative Instrumentslower rates on variable rate debt
($2.2 million) and Hedging Activities. See Note 5 of Notes to Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCESa decrease in interest associated with KU's accounts
receivable securitization program ($0.6 million).
-22-
Liquidity and Capital Resources
LG&E's and KU's need for capital funds are largely related to the
construction of plant and equipment necessary to meet the needs of electric
and gas utility customers. Lines of credit, the accounts receivable
securitization programs, and commercial paper programs are maintained to
fund temporaryshort-term capital requirements.
Construction expenditures for the three months ended March 31, 2001, of $66.3
million2002 for
LG&E and $60.3KU amounted to $24.9 million for KU,and $23.6 million, respectively.
Such expenditures related primarily for the purchase of two
jointly owned combustion turbines,to construction to meet nitrogen oxide
(NOx) emission standards, and were financed with internally generated funds
and the accounts receivable securitization program.program funds. Also, no common
dividends have been paid by LG&E or KU for the three months ended March 31,
2002. See Note 6 of Notes to Financial Statements concerning accounts
receivable securitization.
LG&E's and KU's combined cash and temporary cash investment balance
increased $8.4$16.0 million (LG&E $4.5$14.0 million, KU $3.9$2.0 million) during the
three months ended March 31, 2001.2002. The increase reflects cash flows from
operations and short term borrowings, partially offset by construction
expenditures and debt repayments.expenditures.
Variations in accounts receivable, accounts payable and materials and
supplies are generally not significant indicators of LG&E's and KU's
liquidity. Such variations are primarily attributable to fluctuations in
weather, which have a direct effect on sales of electricity and natural
gas. The decreasesincreases in accounts receivable resulted mainlyprimarily from seasonal
fluctuations and the reduced sales of accounts receivable through LG&E and
KU's accounts receivable securitization program started at LG&E and KU.program. See Note 6 of Notes to
Financial Statements. The increase in fuel inventory resulted from seasonal
fluctuations at LG&E and KU, and the decrease in LG&E's gas stored
underground resulted from seasonal fluctuations.
AtLG&E and KU participate in a money pool whereby LG&E Energy can make funds
available to LG&E and KU at market-based rates up to $200 million each.
LG&E Energy maintains a facility of $200 million with a Powergen subsidiary
to ensure funding availability for the money pool. There is no balance
outstanding under the Powergen line of credit as of March 31, 2001, unused capacity under2002 and no
outstanding commercial paper program balance. LG&E's lines&E Energy has provided
loans to LG&E and KU through the money pool that total $122.6 million and
$64.2 million, respectively, as of credit totaled $200
million. KU had no committed linesMarch 31, 2002. These borrowings
carried a commercial paper grade interest rate of credit1.80% at March 31, 2001.2002.
On March 6, 2002, LG&E refinanced its $22.5 million and $27.5 million
unsecured pollution control bonds, both due September 1, 2026. The
replacement bonds, due September 1, 2026, are variable rate bonds and are
secured by first mortgage bonds.
On March 22, 2002, LG&E refinanced its two $35 million unsecured pollution
control bonds due November 1, 2027. The replacement variable rate bonds
are secured by first mortgage bonds and will mature November 1, 2027.
LG&E's debtsecurity ratings as of April 9, 2001,March 31, 2002, were:
20
MOODY'S S&P FITCH
------- --- -----
First mortgage bonds A1 A- A+
Unsecured debt A2 BBB A
Preferred stock a2 BBB- A-
Commercial paper P-1 A-2 F-1
KU's debt ratings as of April 9, 2001, were:
MOODY'S S&P FITCH
------- --- -----
Moody's S&P Fitch
First mortgage bonds A1 A- A+
Preferred stock a2 BBB- A-
Commercial paper P-1 A-2 F-1
KU's security ratings as of March 31, 2002, were:
Moody's S&P Fitch
First mortgage bonds A1 A- A+
Preferred stock a2 BBB- A-
Commercial paper P-1 A-2 F-1
-23-
The Moody's and S&P's&P ratings of LG&E's and KU's debt securities are on Credit Watch for
upgrade as the result of the E.ON bid. Fitch has placed LG&E and KU on
credit watch evolving following the E.ON bid. These ratings reflect the
views of Moody's, S&P and Fitch. A security rating is not a recommendation
to buy, sell or hold securities and is subject to revision or withdrawal at
any time by the rating agency.
LG&E's capitalization ratios at March 31, 2001,2002, and December 31, 2000,2001,
follow:
Mar. 31, Dec. 31,
2001 2000
---- ----
Long-term debt (including current portion) 40.1% 38.0%
Notes payable 6.0 7.2
Preferred stock 6.3 6.0
Common equity 47.6 48.8
----- -----Mar. 31, Dec. 31,
2002 2001
Long-term debt (including current portion) 36.5% 37.5%
Notes payable 7.2 5.7
Preferred stock 5.6 5.8
Common equity 50.7 51.0
Total 100.0% 100.0%
===== =====
KU's capitalization ratios at March 31, 2001,2002, and December 31, 2000,2001,
follow:
Mar. 31, Dec. 31,
2001 2000
---- ----
Long-term debt (including current portion) 39.4% 38.6%
Notes payable 3.7 4.9
Preferred stock 3.2 3.2
Common equity 53.7 53.3
----- -----
Total 100.0% 100.0%
===== =====
Mar. 31, Dec. 31,
2001 2001
Long-term debt (including current portion) 36.0% 37.2%
Notes payable 4.8 3.6
Preferred stock 3.0 3.1
Common equity 56.2 56.1
Total 100.0% 100.0%
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets were issued
in the second quarter of 2001. Therefore, the provisions of these new
pronouncements were effective July 1, 2001, for LG&E and KU. SFAS No. 141
requires all business combinations initiated after June 30, 2001, to be
accounted for using the purchase method. SFAS No. 142 requires goodwill to
be recorded, but not amortized. Furthermore, goodwill will now be subject
to a periodic assessment for impairment. LG&E and KU have no recorded
goodwill and have no merger or acquisitions in progress. Accordingly,
these pronouncements have no effect on the financial condition and results
of operations for LG&E or KU. The Companies experienced no impact on the
financial position or results of operation as a result of adopting these
standards.
-24-
SFAS No. 143, Accounting for Asset Retirement Obligations and SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, were issued
during 2001. SFAS No. 143 establishes accounting and reporting standards
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 144 supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
SFAS No. 144, among other provisions, eliminates the requirement of SFAS
No. 121 to allocate goodwill to long-lived assets to be tested for
impairment. The effective implementation date for SFAS No. 144 is January
1, 2002 and SFAS No. 143 is January 1, 2003. SFAS No. 144 had no current
impact on the financial position or results of operations of LG&E or KU.
Management has not determined what impact SFAS No. 143 will have on the
financial position or results of operations of the Companies.
The Financial Accounting Standards Board created the Derivatives
Implementation Group (DIG) to provide guidance for implementation of SFAS
No. 133. DIG Issue C15, Normal Purchases and Normal Sales Exception for
Option Type Contracts and Forward Contracts in Electricity was adopted in
2001 and had no impact on results of operations or financial condition.
DIG Issue C16, Applying the Normal Purchase and Normal Sales Exception to
Contracts that Combine a Forward Contract and a Purchased Option Contract,
was cleared in the third quarter 2001 and stated that option contracts do
not meet the normal purchases and normal sales exception and should follow
SFAS No. 133. DIG Issue C16 will become effective in the second quarter of
2002. The Companies have reviewed their contracts for options and
determined that DIG Issue C16 does apply, but the adoption of DIG Issue C16
will not have a material impact on the financial position or results of
operations of the Companies pursuant to regulatory treatment prescribed by
SFAS No. 71, Accounting for the Effects of Certain Types of Regulation.
For a description of significant contingencies that may affect LG&E and KU,
reference is made to Part I, Item 3, Legal Proceedings, and Notes 12 (LG&E)
and 11 (KU) to the financial statements of LG&E's and KU's Annual Reports
on form 10-K10-K. For the year ended December 31, 20002001 and to Part II herein
- -
Item 1, Legal Proceedings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk. -25-
LG&E and KU are exposed to market risks. Both operations are exposed to
market risks from changes in interest rates and commodity prices. To
mitigate changes in cash flows attributable 21
to these exposures, the
Companies have entered into various derivative instruments. Derivative
positions are monitored using techniques that include market value and
sensitivity analysis.
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to Company
policy, use of these financial instruments is intended to mitigate risk and
earnings volatility and is not speculative in nature. Management has
designated all of the Companies' interest rate swaps as hedge instruments.
Financial instruments designated as cash flow hedges have resulting gains
and losses recorded within other comprehensive income and stockholders'
equity. To the extent a financial instrument or the underlying item being
hedged is prematurely terminated or the hedge becomes ineffective, the
resulting gains or losses are reclassified from other comprehensive income
to net income. Financial instruments designated as fair value hedges are
periodically marked to market with the resulting gains and losses recorded
directly into net income to correspond with income or expense recognized
from changes in market value of the items being hedged.
The potential change in interest expense resulting from changes in base
interest rates of the Companies' unswapped debt did not change materially
in the first
quarter of 2001.2002. The potential changes in the fair values of the Company's
interest-rate swaps resulting from changes in interest rates and the yield
curve also did not change materially in the first quarter of 2001.2002. The Company's exposure to
market risks from changes in commodity prices remained immaterial in the first quarter of 2001.2002.
-26-
Part II. Other Information
Item 1. Legal Proceedings.
For a description of the significant legal proceedings involving LG&E and
KU, reference is made to the information under the following items and
captions of LG&E's and KU's respective combined Annual Report on Form 10-K
for the year ended December 31, 2000:2001: Item 1, Business; Item 3, Legal
Proceedings; Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations and Financial
Condition;Operations; Notes 3, 11 and 1214 of LG&E's Notes to
Financial Statements under Item 8 and Notes 3, 12 and 1116 of KU's Notes to
Financial Statements under Item 8. Except as described herein, to date,
the proceedings reported in LG&E's and KU's respective combined Annual
Report on Form 10-K have not changed materially.
E.ON - POWERGEN TRANSACTIONE.ON-Powergen Transaction
On April 9, 2001, E.OnE.ON AG announced a conditional offer to purchase all the
common shares of Powergen plc, the indirect corporate parent of LG&E and
KU. The transaction is subject to a number of conditions precedent,
including the receipt of regulatory approvals from European and United
States governmental bodies, in form satisfactory to the parties. Among the
primary United States regulatory approvals are: the Kentucky Public Service
Commission, the Virginia State Corporation Commission, the Securities and
Exchange Commission, and the Federal Energy Regulatory Commission. The
parties anticipate that thesethe remaining approvals may be received by early 2002mid-2002
to permit completion of the transaction in early spring 2002. However, there can be no
assurance that such approvals will be obtained in form or timing sufficient
for such dates.
Regulatory orders approving the E.ON transaction were received from the
Kentucky Commission on August 6, 2001, from the Virginia State Corporation
Commission on October 5, 2001, the Federal Energy Regulatory Commission on
October 11, 2001, and the Tennessee Regulatory Authority on October 23,
voted in an open hearing to approve the transaction with an affirmative
order issued shortly thereafter. On November 15, 2001, the Commission of
the European Communities granted E.ON AG and Powergen plc transaction
approval.
On April 19, 2002, Powergen plc shareholders voted in favor of certain
resolutions to approve the acquisition of Powergen plc by E.ON AG by means
of a scheme of arrangement under United Kingdom law.
Other
On April 16, 2002, the LG&E 5% Cumulative Preferred class of stock was
delisted from the NASDAQ Small Capitalization Market. Delisting will
enable the Companies to realize certain administrative and corporate
governance efficiencies.
In May 2002, KU filed a request with the Philadelphia Stock Exchange
seeking delisting of its 4.75% Cumulative Preferred class of stock, which
delisting may become effective shortly. Delisting will enable the
Companies to realize certain administrative and corporate governance
efficiencies.
Item 6(a). Exhibits.
None.
Item 6(b). Reports on Form 8-K.
On April 30, 2001, LG&E and KU filed a Current Report on Form 8-K announcing a
change in the companies certifying accountants.
22None.
-27-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Louisville Gas and Electric Company
- -----------------------------------
Registrant
Date: May 15, 200114, 2002 /s/ S. Bradford Rives
---------------------
S. Bradford Rives
Senior Vice President - Finance and
Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kentucky Utilities Company
- --------------------------
Registrant
Date: May 15, 200114, 2002 /s/ S. Bradford Rives
---------------------
S. Bradford Rives
Senior Vice President - Finance and
Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
23 -28-