QuickLinks-- Click here to rapidly navigate through this documentSCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )

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14a-6(e)(2))
/X/ Definitive Proxy Statement
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/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12

LOUISVILLE GAS AND ELECTRIC COMPANY
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(Name of Registrant as Specified In Its Charter)

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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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[LOGO]

March 26, 1999

Filed by the Registrant /x/
Filed by a Party other than the Registrant / /

Check the appropriate box:
/ / Preliminary Proxy Statement
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/x/ Definitive Proxy Statement
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Louisville Gas and Electric Company
(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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/x/ No fee required
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(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
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December 5, 2001
Dear Louisville Gas and Electric Company shareholder:Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of Louisville Gas and Electric Company to be held on Wednesday, April 21, 1999,December 19, 2001 at 10:2:00 a.m.p.m., E.D.T.local time at the Kentucky Center forThird Floor Assembly Room at the Arts, 501 WestLG&E Building, Third and Main Street,Streets, Louisville, Kentucky.
Business items to be acted upon at the Annual Meeting are the election of nineseven directors, the approval of Arthur AndersenPricewaterhouseCoopers LLP as independent auditors of the Company for 19992001 and the transaction of any other business properly brought before the meeting. Additionally, we will report on the progress of LG&E and shareholders will have the opportunity to present questions of general interest.
We encourage you to read the proxy statement carefully and complete, sign and return your proxy in the envelope provided, even if you plan to attend the meeting. Returning your proxy to us will not prevent you from voting in person at the meeting, or from revoking your proxy and changing your vote at the meeting, if you are present and choose to do so.
If you plan to attend the Annual Meeting, please check the box on the proxy card indicating that you plan to attend the meeting. Please bring the Admission Ticket, which forms the top portion of the form of proxy, to the meeting with you. If you wish to attend the meeting but do not have an Admission Ticket, you will be admitted to the meeting after presenting personal identification and evidence of ownership.
The directors and officers of LG&E appreciate your continuing interest in the business of LG&E. We hope you can join us at the meeting.

Sincerely,

[SIGNATURE]

Roger W. Hale

CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER

[LOGO]

Victor A. Staffieri
Chairman of the Board, President and
Chief Executive Officer

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of Louisville Gas and Electric Company ("LG&E"), a Kentucky corporation, will be held at the Kentucky Center forThird Floor Assembly Room in the Arts, 501 WestLG&E Building, Third and Main Street,Streets, Louisville, Kentucky, on Wednesday April 21, 1999,December 19, 2001 at 10:2:00 a.m.p.m., E.D.T.local time. At the Annual Meeting, shareholders will be asked to consider and vote upon the following matters, which are more fully described in the accompanying proxy statement:
1.
A proposal to elect ninethree directors five for three-year terms expiring in 2002, two directors for two-year terms expiring in 20012003 and two directors for one-year terms expiring in 2000;

2004;

2.
A proposal to approve and ratify the appointment of Arthur AndersenPricewaterhouseCoopers LLP as independent auditors of LG&E for 1999;

2001; and

3.
Such other business as may properly come before the meeting.
The close of business on February 16, 1999November 21, 2001 has been fixed by the Board of Directors as the record date for determination of shareholders entitled to notice of and to vote at the Annual Meeting or any adjournment thereof.
You are cordially invited to attend the annual meeting.WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE REPLY ENVELOPE AS SOON AS POSSIBLE. Your cooperation in signing and promptly returning your proxy is greatly appreciated.
By Order of the Board of Directors,
John R. McCall, Secretary
Louisville Gas and Electric Company
Company.
220 West Main Street
Louisville, Kentucky 40202

March 26, 1999
December 5, 2001
PROXY STATEMENT
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ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 21, 1999

----------------------DECEMBER 19, 2001
The Board of Directors of Louisville Gas and Electric Company ("LG&E" or the "Company") hereby solicits your proxy, and asks that you vote, sign, date and promptly mail the enclosed proxy card for use at the Annual Meeting of Shareholders to be held April 21, 1999,December 19, 2001, and at any adjournment of such meeting. The meeting will be held at the Kentucky Center forThird Floor Assembly Room of the Arts, 501 WestLG&E Building, Third and Main Street,Streets, Louisville, Kentucky. This proxy statement and the accompanying proxy were first mailed to shareholders on or about March 26, 1999.December 5, 2001.
If you plan to attend the meeting, please check the box on the proxy card indicating that you plan to attend the meeting. Also, please bring the Admission Ticket, which forms the top portion of the form of proxy, to the meeting with you. Shareholders who do not have an Admission Ticket, including beneficial owners whose accounts are held by brokers or other institutions, will be admitted to the meeting upon presentation of personal identification and, in the case of beneficial owners, proof of ownership.
The outstanding stock of LG&E is divided into three classes: Common Stock, Preferred Stock (without par value), and Preferred Stock, par value $25 per share. At the close of business on February 16, 1999,November 21, 2001, the record date for the Annual Meeting, the following shares of each were outstanding:
Common Stock, without par value............................ value 21,294,223 shares
Preferred Stock, par value $25 per share, 5% Series........ Series 860,287 shares
Preferred Stock, without par value, $5.875 Series.......... Series 250,000 shares
Auction Series A (stated value $100 per share)............. 500,000 shares
All of the outstanding LG&E Common Stock is owned by LG&E Energy Corp. ("LG&E Energy"). Based on information contained in a Schedule 13G originally filed with the Securities and Exchange Commission in October 1998, AMVESCAP PLC, a parent holding company, reported certain holdings in excess of five percent of LG&E's Preferred Stock. AMVESCAP PLC, with offices at 1315 Peachtree Street, N.W., Atlanta, Georgia 30309, and certain of its subsidiaries reported sole voting and dispositive power as to no shares and shared voting and dispositive power as to 43,000 shares of LG&E Preferred Stock, without par value, $5.875 Series, representing 17.2% of that class of Preferred Stock. The reporting companies indicated that they hold the shares on behalf of other persons who have the right to receive or the power to direct the receipt of dividends or the proceeds of sales of the shares. No other persons or groups are known by management to be beneficial owners of more than five percent of LG&E's Preferred Stock. As of February 16, 1999, allNovember 21, 2001, no directors, nominees for director andor executive officers of LG&E as a group beneficially owned noany shares of LG&E Preferred Stock.
Owners of record of LG&E Energy Common Stock at the close of business on February 16, 1999,November 21, 2001 of theLG&E Common Stock and the 5% Cumulative Preferred Stock, par value $25 per share (the "5% Preferred Stock") are entitled to one vote per share for each matter presented at the Annual Meeting or any adjournment thereof. In addition, each shareholder has cumulative voting rights with respect to the election of directors. Accordingly, in electing directors, each shareholder is entitled to as many votes as the number of shares of stock owned multiplied by the number of directors to be elected. All such votes may be cast for a single nominee or may be distributed among two or more nominees. The persons named as proxies reserve the right to cumulate votes represented by proxies that they receive and to distribute such votes among one or more of the nominees at their discretion.

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You may revoke your proxy at any time before it is voted by giving written notice of its revocation to the Secretary of LG&E, by delivery of a later dated proxy, or by attending the Annual Meeting and voting in person. Signing a proxy does not preclude you from attending the meeting in person.
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Directors are elected by a plurality of the votes cast by the holders of LG&E's Common Stock and 5% Preferred Stock at a meeting at which a quorum is present. "Plurality" means that the individuals who receive the largest number of votes cast are elected as directors up to the maximum number of directors to be chosen at the meeting. Consequently, any shares not voted (whether by withholding authority, broker non-vote or otherwise) have no impact on the election of directors except to the extent the failure to vote for an individual results in another individual receiving a larger percentage of votes.
The affirmative vote of a majority of the shares of LG&E Common Stock and 5% Preferred Stock represented at the Annual Meeting is required for the approval of the independent auditors and any other matters that may properly come before the meeting. Abstentions from voting on any such matter are treated as votes against, while broker non-votes are treated as shares not voted.
LG&E Energy owns all of the outstanding LG&E Common Stock, and intends to vote this stock in favor of the nominees for directors as set forth below, thereby ensuring their election to the Board. LG&E Energy also intends to vote all of the outstanding LG&E Common Stock in favor of the appointment of Arthur
AndersenPricewaterhouseCoopers LLP as the independent auditors for LG&E as set forth in Proposal No. 2. Nonetheless, the Board encourages you to vote on each of these matters, and appreciates your interest.
The AnnualLouisville Gas and Electric Company 2000 Financial Report, to Shareholders of LG&E Energy (the "Annual Report"),
including its consolidated financial statements and information regarding LG&E,
is enclosed with this proxy statement. The Annual Report is supplemented bycontaining audited financial statements of LG&E and management's discussion of such financial statements, which are included as an appendix to this proxy statement (the "Appendix""Financial Report"), and are incorporated by reference herein. All shareholders are urged to read the accompanying Annual ReportFinancial Report.
On December 11, 2000, Powergen plc, a public limited company with registered offices in England and Appendix.

Wales ("Powergen") completed its acquisition of LG&E Energy, the parent corporation of LG&E, for cash of approximately $3.2 billion, or $24.85 per share of LG&E Energy common stock. In connection with such transaction, certain officers and directors of Powergen were appointed to fill vacancies in the Board of Directors of LG&E occurring by resignation of prior directors.
On April 9, 2001, E.ON AG ("E.ON") announced a conditional offer to purchase all the common shares of Powergen, 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 ("KPSC"), the Virginia State Corporation Commission ("VSCC"), the Securities and Exchange Commission, and the Federal Energy Regulatory Commission ("FERC"). Regulatory orders approving the E.ON transaction have been received from the KPSC, VSCC and FERC. The parties anticipate that the remaining approvals may be received by early 2002 to permit completion of the transaction in spring 2002. However, there can be no assurance that such approvals will be obtained in form or timing sufficient for such dates.
In October 2001, the Board of Directors of LG&E authorized the delisting of the 5% Preferred Stock from the NASDAQ Small Capitalization Market. Delisting could occur following applications to the relevant exchanges and applicable regulatory agencies. Delisting does not constitute a change in the terms and conditions of the 5% Preferred Stock nor the rights and privileges of its shareholders. Delisting is proposed in order to enable the Company to realize certain administrative and corporate governance efficiencies following the LG&E Energy-Powergen merger.
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PROPOSAL NO. 1
ELECTION OF DIRECTORS
The number of members of the Boardboard of Directorsdirectors of LG&E is currently fixed at eighteennine, pursuant to the Company's bylaws and resolutions adopted by the Board of Directors. The directors are classified into three classes, as nearly equal in number as possible, with respect to the time for which they are to hold office. Generally, one class of directors is elected at each year's Annual Meeting to serve for three-year terms and to continue in office until their successors are elected and qualified. However, under Kentucky law, directors appointed to fill vacancies serve terms which expire at the next meeting of shareholders at which directors are elected. These additional required elections are also discussed below.

In May 1998,
On December 11, 2000, upon the closing of the merger (the "Merger") of KU Energy
Corporation ("KU Energy") intotransaction involving Powergen and LG&E Energy, all members of the LG&E Board of Directors, with the exception of Roger W. Hale, resigned, and the size of the Board of Directors was establishedfixed at eighteen. Seven former KU Energynine. Six Powergen directors, Mira S. Ball,
Carol M. Gatton, Frank V. Ramsey, Jr., William L. Rouse, Jr., Charles L.
Shearer, Ph.D., Lee T. Todd, Jr., Ph.D.Paul Myners, Sir Frederick Crawford, Sydney Gillibrand, Edmund Wallis, Dr. David K-P Li, and Michael R. WhitleyRoberto Quarta, and one Powergen officer, David Jackson, were appointed to fill all but one of the vacancies created by the above resignations.
In January 2001, Roger W. Hale announced his resignation as an officer and member of the LG&E Board of Directors, effective April 30, 2001. Victor A. Staffieri and Peter Hickson were appointed to fill the vacancies created by the increase in sizeresignation of Roger W. Hale and the Board.previously-existing vacancy. In December
1998,August 2001, Paul Myners and Roberto Quarta announced their resignations from the Boards of Directors of Powergen and LG&E and Peter Hickson resigned from the Board of Directors of LG&E. Nicholas Baldwin, the Chief Executive Officer of Powergen, was then appointed to fill the vacancy of Mr. Whitley and S. Gordon Dabney retired as directors. Donald C. Swain,
Ph.D., who currently serves with the class of directors whose terms expire atHickson.
At this Annual Meeting, has indicated his present intentionthe following seven persons are proposed for election to retire concurrent
with the Board of Directors, pursuant to Kentucky law requiring that directors appointed to fill vacancies stand for election for the remainder of their unfulfilled terms at the next meeting of shareholders at which directors are elected:
For one-year terms expiring at the 2002 Annual Meeting: Sydney Gillibrand, Victor A. Staffieri and is not standing for re-election as a director.Nicholas P. Baldwin.
For two-year terms expiring at the 2003 Annual Meeting: Edmund A. Wallis and Dr. Swain has served as a director of LG&E since 1985David K-P Li
For three-year terms expiring at the 2004 Annual Meeting: Sir Frederick Crawford and of LG&E Energy since 1990.David J. Jackson.
Despite the remaining vacancies on the Board of Directors, shareholders may not vote for a number of directors greater than the number of nominees named in this proxy statement. Procedures for reviewing
Messrs. Baldwin, Staffieri, Crawford, Gillibrand, Wallis and nominating candidates to theDr. Li are presently directors of Powergen. Messrs. Baldwin, Staffieri and Jackson are presently directors of LG&E Board of Directors are discussed in more detail in "Information Concerning
the Board of Directors--Nominating and Governance Committee."

At this Annual Meeting, the following nine persons are proposed for election
to the Board of Directors:

For three-year terms expiring at the 2002 Annual Meeting: Mira S. Ball,
Roger W. Hale, David B. Lewis, Anne H. McNamara and Frank V. Ramsey, Jr.

For two-year terms expiring at the 2001 Annual Meeting: Carol M. Gatton
and Lee T. Todd, Jr.

For one-year terms expiring at the 2000 Annual Meeting: William L. Rouse,
Jr. and Charles L. Shearer.Energy. All of the nominees are presently directors of LG&E Energy, LG&E and of Kentucky Utilities Company ("KU").
The Board of Directors does not know of any nominee who will be unable to stand for election or otherwise serve as a director. If for any reason any nominee becomes unavailable for election, the Board of Directors may designate a substitute nominee, in which event the shares represented on the proxy cards returned to LG&E will be voted for such substitute nominee, unless an instruction to the contrary is indicated on the proxy card.
The composition of the Board of Directors of LG&E following the completion of E.ON's acquisition of Powergen is not known, but such Board is likely to contain at least one current director or officer of LG&E Energy. Accordingly, certain of the directors of LG&E Energy or LG&E may cease to serve as directors of LG&E in the event the E.ON-Powergen transaction is completed.
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THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE ELECTION OF THE NINESEVEN NOMINEES FOR DIRECTOR.

3
INFORMATION ABOUT DIRECTORS AND NOMINEES
The following contains certain information as of February 16, 1999,November 30, 2001 concerning the nominees for director:
Nominees for Directors with Terms Expiring at the 2002 Annual Meeting of Shareholders
Sydney Gillibrand CBE (Age 67). Mr. Gillibrand was appointed a director of Powergen plc on May 31, 1999. He is chairman of AMEC plc and TAG Aviation (UK) and a non-executive director of ICL, and Messier-Dowty. He was previously vice-chairman of British Aerospace plc. Mr. Gillibrand has been a director of LG&E and KU since December 2000.
Nicholas P. Baldwin (Age 48). Chief Executive of Powergen since February 21, 2001. Mr. Baldwin was appointed a director of Powergen plc on October 22, 1998, having been a director of Powergen UK plc since February 1998. Until his appointment as wellChief Executive in February 2001, he was previously Executive Director, UK Operations of Powergen. He joined the CEGB, the predecessor of Powergen in 1980. In the United Kingdom, he is also a director of the Electricity Association and a Director and Trustee of Midlands Excellence and is a representative on the IEA's Coal Industry Advisory Board. Mr. Baldwin has been a director of LG&E Energy, LG&E and KU since August 2001.
Victor A. Staffieri (Age 46). Chairman, President and Chief Executive Officer of LG&E Energy, LG&E and KU, April 2001 to present. He served as President and Chief Operating Officer of LG&E Energy, LG&E and KU from February 1999 to April 2001; Chief Financial Officer of Energy and LG&E, May 1997 to February 2000; Chief Financial Officer of KU, May 1998 to February 2000; President, Distribution Services Division of LG&E Energy, December 1995 to May 1997; Senior Vice President, General Counsel and Public Policy of LG&E Energy and LG&E from November 1992 to December 1993. Mr. Staffieri has been a director of Powergen, LG&E Energy, LG&E and KU since April 2001.
Nominees for Directors with Terms Expiring at the directors whose terms2003 Annual Meeting of office continue afterShareholders
Edmund A. Wallis (Age 62). Mr. Wallis is Chairman of Powergen plc. He was appointed a director of Powergen plc on October 22, 1998, serving as Chairman of such Board since that date. He was also Chief Executive of Powergen from October 1998 until February 21, 2001. He had been Chief Executive of Powergen UK plc since March 1990 and Chairman since July 1996. He is a non-executive director of Mercury European Privatisation Trust plc and a non-executive director of London Transport. He was also formerly non-executive chairman of LucasVarsity plc. Mr. Wallis has been on the 1999Board of Directors of LG&E and KU since December 2000.
Dr. David K-P Li (Age 62). Dr. Li was appointed a director of Powergen plc on October 22, 1998, having been a non-executive director of Powergen UK plc since January 1998. He is chairman and chief executive of The Bank of East Asia Limited, having been a director since 1977, and holds directorships of numerous companies in the Far East and elsewhere, including The Hong Kong and China Gas Company Limited. Dr. Li has been a director of LG&E and KU since December 2000.
Nominees for Directors with Terms Expiring at the 2004 Annual Meeting.

NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT 2002 ANNUAL MEETING OF
SHAREHOLDERS

MIRA S. BALL (AGE 64)

Mrs. Ball has been Secretary-Treasurer and Chief Financial Officer of
[PHOTO] Ball Homes, Inc., a residential developer and property management
company in Lexington, Kentucky, since August 1959. Mrs. Ball is a
graduate of the University of Kentucky. Mrs. Ball has been a director
of LG&E Energy and LG&E since May 1998 and of KU since 1992.

ROGER W. HALE (AGE 55)
Mr. Hale has been a Director and Chairman of the Board and Chief
Executive Officer of LG&E Energy since August 1990. Mr. Hale served as
[PHOTO1] President of LG&E Energy from August 1990 to May 1998. Mr. Hale has
also been Chief Executive Officer and a Director of LG&E since June
1989, Chairman of the Board of LG&E since February 1, 1990, and served
as President of LG&E from June 1989 until January 1, 1992. Mr. Hale has
been a Director and Chairman of the Board and Chief Executive Officer
of KU since May 1998. Prior to his coming to LG&E, Mr. Hale served as
Executive Vice President of Bell South Enterprises, Inc. Mr. Hale is a
graduate of the University of Maryland, and received a master's degree
in management from the Massachusetts Institute of Technology, Sloan
School of Management. Mr. Hale is also a member of the Board of
Directors of Global TeleSystems Group, Inc. and H&R Block, Inc.

DAVID B. LEWIS (AGE 54)

Mr. Lewis is a founding partner of the law firm of Lewis & Munday, a
[PHOTO] Professional Corporation, in Detroit, Michigan. Since 1972, Mr. Lewis
has served as Chairman of the Board and a Director of the firm. Mr.
Lewis is a graduate of Oakland University and received his law degree
from the University of Michigan Law School. He also received a master's
degree in business administration from the University of Chicago
Graduate School of Business. Mr. Lewis has been a director of LG&E
Energy and LG&E since November 1992 and of KU since May 1998. Mr. Lewis
is also a member of the Board of Directors of TRW, Inc., M.A. Hanna
Company and Comerica Bank, a subsidiary of Comerica Incorporated.
Meeting of Shareholders
Sir Frederick Crawford (Age 70). Sir Frederick was appointed a director of Powergen plc on October 22, 1998, having been a non-executive director of Powergen UK plc since June 1990. He is chairman of the Criminal Cases Review Commission and a Fellow of the Royal Academy of Engineering. He has held appointments as Professor of Electrical Engineering at Stanford University, and as Vice-Chancellor of
4
ANNE H. MCNAMARA (AGE 51)

Mrs. McNamara has been Senior Vice President and General Counsel of AMR
[PHOTO] Corporation and its subsidiary, American Airlines, Inc., since June
1988. Mrs. McNamara is a graduate of Vassar College, and received her
law degree from Cornell University. She has been a director of LG&E
Energy and LG&E since November 1991 and of KU since May 1998. Mrs.
McNamara is also a member of the Board of Directors of The SABRE Group
Holdings, Inc.

FRANK V. RAMSEY, JR. (AGE 67)

Mr. Ramsey has been President and a Director of Dixon Bank, Dixon,
[PHOTO] Kentucky, since October 1972. Mr. Ramsey is a graduate of the
University of Kentucky. Mr. Ramsey has been a director of LG&E Energy
and LG&E since May 1998 and of KU since 1986.

NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT 2001 ANNUAL MEETING OF
SHAREHOLDERS

CAROL M. GATTON (AGE 66)

Mr. Gatton has been Chairman and Director of Area Bancshares Corpora-
[PHOTO] tion, an Owensboro, Kentucky bank holding company, since April 1976.
Mr. Gatton is also owner of Bill Gatton Chevrolet-Cadillac-Isuzu in
Bristol, Tennessee. Mr. Gatton is a graduate of the University of
Kentucky, and received a master's degree in business administration
from the University of Pennsylvania, Wharton School of Business. Mr.
Gatton has been a director of LG&E Energy and LG&E since May 1998 and
of KU since 1996.

LEE T. TODD, JR., PH.D. (AGE 52)

Dr. Todd has been President and Chief Executive Officer and Director of
[PHOTO] DataBeam Corporation, a Lexington, Kentucky high-technology firm, since
April 1976. Dr. Todd is a graduate of the University of Kentucky. He
also received a master's degree and doctorate in electrical engineering
from the Massachusetts Institute of Technology. Dr. Todd has been a
director of LG&E Energy and LG&E since May 1998 and of KU since 1995.

NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT 2000 ANNUAL MEETING OF
SHAREHOLDERS

WILLIAM L. ROUSE, JR. (AGE 66)

Mr. Rouse was Chairman of the Board and Chief Executive Officer and
[PHOTO] director of First Security Corporation of Kentucky, an Owensboro,
Kentucky multi-bank holding company, prior to his retirement in 1992.
Mr. Rouse is a graduate of the University of Kentucky. Mr. Rouse has
been a director of LG&E Energy and LG&E since May 1998 and of KU since
1989. Mr. Rouse is also a member of the Board of Directors of Ashland,
Incorporated and Kentucky-American Water Company, a subsidiary of
American Water Works Company, Inc.

CHARLES L. SHEARER, PH.D. (AGE 56)

Dr. Shearer has been President of Transylvania University since July
[PHOTO] 1983. Dr. Shearer is a graduate of the University of Kentucky and
received a master's degree in diplomacy and international commerce from
that institution. He also received a master's degree and a doctorate in
economics from Michigan State University. Dr. Shearer has been a
director of LG&E Energy and LG&E since May 1998 and of KU since 1987.

DIRECTORS WHOSE TERMS EXPIRE AT 2001 ANNUAL MEETING OF SHAREHOLDERS

OWSLEY BROWN II (AGE 56)

Mr. Brown has been the Chairman and Chief Executive Officer of Brown-
[PHOTO] Forman Corporation, a consumer products company, since July 1995, and
was President of Brown-Forman Corporation from 1987 to 1995. Mr. Brown
was first named Chief Executive Officer of Brown-Forman Corporation in
July 1994. Mr. Brown is a graduate of Yale University, and received his
master's degree in business administration from Stanford University. He
has been a director of LG&E Energy since August 1990, of LG&E since May
1989 and KU since May 1998. Mr. Brown is also a member of the Board of
Directors of Brown-Forman Corporation and North American Coal
Corporation, a subsidiary of NACCO Industries, Inc.

GENE P. GARDNER (AGE 69)

Mr. Gardner has been Chairman of Beaver Dam Coal Company, which is
[PHOTO] engaged in the ownership and development of coal properties, since
April 1983. Mr. Gardner is a graduate of the University of Louisville
and of the Advanced Management Program of the University of Virginia,
Colgate-Darden Graduate School of Business. Mr. Gardner has been a
director of LG&E since July 1979 and served as a director of LG&E
Energy from August 1990 until May 1998. He is also a member of the
Board of Directors of Commonwealth Bank and Trust Company, Commonwealth
Financial Corporation and Thomas Industries, Inc.

J. DAVID GRISSOM (AGE 60)

Mr. Grissom has been Chairman of Mayfair Capital, Inc., a private
[PHOTO] investment firm, since April 1989. He served as Chairman and Chief
Executive Officer of Citizens Fidelity Corporation from April 1977
until March 31, 1989. Upon the acquisition of Citizens Fidelity
Corporation by PNC Financial Corp. in February 1987, Mr. Grissom served
as Vice Chairman and as a Director of PNC Financial Corp. until March
1989. Mr. Grissom is a graduate of Centre College and the University of
Louisville School of Law. Mr. Grissom has been a director of LG&E
Energy since August 1990, of LG&E since January 1982 and of KU since
May 1998. He is also a member of the Board of Directors of Providian
Financial Corporation and Churchill Downs, Inc.

DIRECTORS WHOSE TERMS EXPIRE AT 2000 ANNUAL MEETING OF SHAREHOLDERS

WILLIAM C. BALLARD, JR. (AGE 58)

Mr. Ballard has been of counsel to the law firm of Greenebaum Doll &
[PHOTO] McDonald PLLC since May 1992. He served as Executive Vice President and
Chief Financial Officer from 1978 until May 1992, of Humana, Inc., a
healthcare services company. Mr. Ballard is a graduate of the
University of Notre Dame, and received his law degree, with honors,
from the University of Louisville School of Law. He also received a
Master of Law degree in taxation from Georgetown University. Mr.
Ballard has been a director of LG&E Energy since August 1990, of LG&E
since May 1989 and of KU since May 1998. Mr. Ballard is also a member
of the Board of Directors of United Healthcare Corp., Health Care REIT,
Inc., Healthcare Recoveries, Inc., MidAmerica Bancorp, American Safety
Razor, Inc. and Jordan Telecommunications Products, Inc.

JEFFERY T. GRADE (AGE 55)

Mr. Grade has been Chairman and Chief Executive Officer and Director of
[PHOTO] Harnischfeger Industries, Inc., which is engaged in the manufacture and
distribution of equipment for the mining and papermaking industries,
since January 1993. He served as President and Chief Executive Officer
from 1992 to 1993 and President and Chief Operating Officer from 1986
to 1992. Mr. Grade is a graduate of the Illinois Institute of
Technology and received a master's degree in business administration
from DePaul University. Mr. Grade has been a director of LG&E Energy
and LG&E since October 1997 and of KU since May 1998. He is also a
member of the Board of Directors of Case Corporation.

T. BALLARD MORTON, JR. (AGE 66)

Mr. Morton has been Executive in Residence at the College of Business
[PHOTO] and Public Administration of the University of Louisville since 1983.
Mr. Morton is a graduate of Yale University. Mr. Morton has been a
director of LG&E Energy since August 1990, of LG&E since May 1967 and
of KU since May 1998. Mr. Morton is also a member of the Board of
Directors of the Kroger Company.

7
Aston University for 16 years. He was formerly a non-executive director of Legal and General Group plc and Rexam plc. Sir Frederick has been a director of LG&E and of KU since December 2000.
David J. Jackson (Age 48). Mr. Jackson is General Counsel and Company Secretary of Powergen plc. He has served on the Board of Directors of LG&E Energy, LG&E and KU since December 2000.
INFORMATION CONCERNING THE BOARD OF DIRECTORS
Each member of the Board of Directors of LG&E is also a directormember of the Board of Directors of KU. Certain members are also directors of Powergen or LG&E Energy, and KU, with the exception of Mr. Gardner and Dr. Swain, who serve only
on the LG&E Board.as described above. The committees of the Board of Directors of LG&E include an Audit Committee a Compensation Committee, a Nominating and Governance Committee
and a Long-Range PlanningCompensation Committee. The directors who are members of the various committees of LG&E serve in the same capacity for purposes of the LG&E
Energy and KU Board of Directors, with the exception of Mr. Gardner and Dr.
Swain, who currently serve on no committees. As discussed earlier, Dr. Swain is
not standing for re-election and has indicated his present intention to retire
following the Annual Meeting.Directors.
During 1998,2000, there were a total of seven meetings of the LG&E Board. All directors attended 75% or more of the total number of meetings of the Board of Directors and Committeescommittees of the Board on which they served withserved. Information concerning the exceptionBoards of Jeffery T. Grade.

COMPENSATION OF DIRECTORSDirectors of LG&E and KU shown below generally relates to the period prior to the completion of the Powergen-LG&E Energy merger.
Compensation of Directors
Directors who are also officers of Powergen, LG&E Energy or its subsidiaries receive no compensation in their capacities as directors. During 1998,2000, non-employee directors received a retainer of approximately $2,333 per month, or $28,000 annually ($30,00030,300 annually for committee chairmen), a fee for Board meetings of $1,100$1,300 per meeting, a fee for each committee meeting of $1,000$1,150 and, where appropriate, reimbursement for expenses incurred in traveling to meetings. Non-employee directors residing out of Kentucky received an additional $1,000 compensation for each Board or committee meeting they attended. The foregoing amounts represent the aggregate fees paid to directors in their capacities as directors of LG&E Energy, LG&E and KU as applicable, during 1998. Upon their resignation as2000.
Prior to the Powergen-LG&E Energy merger, non-employee directors of LG&E Energy during 1998, Messrs. Dabney and Gardner and Dr. Swain each received
one-time awards of $10,000 in recognition of their years of service on that
Board.

Non-employee directors of LG&E mayKU could elect to defer all or a part of their fees (including retainers, fees for attendance at regular and specialannual meetings, committee meetings and travel compensation) pursuant to the former LG&E Energy Corp. Deferred Stock Compensation Plan (the "Deferred Stock Plan").Plan. Each deferred amount iswas credited by LG&E Energy to a bookkeeping account and then iswas converted into a stock equivalent on the date the amount is credited. The numberFollowing completion of stockthe Powergen-LG&E Energy merger, all share equivalents creditedwere converted into the right to receive the merger consideration of $24.85 in cash per share and were paid out in accordance with the terms of the plan and the plan was terminated.
Prior to the director is based upon the average of the high and
the low sale price of LGPowergen-LG&E Energy Common Stock on the New York Stock Exchange
for the five trading days prior to the conversion. Additional stock equivalents
will be added to stock accounts at the time that dividends are declared on LG&E
Energy Common Stock, in an amount equal to the amount of LG&E Energy Common
Stock that could be purchased with dividends that would be paid on the stock
equivalents if converted to LG&E Energy Common Stock. In the event that LG&E
Energy is a party to any consolidation, recapitalization, merger, share exchange
or other business combination in which all or a part of the outstanding LG&E
Energy Common Stock is changed into or exchanged for stock or other securities
of the other entity or LG&E Energy, or for cash or other property, the stock
account of a participating director shall be converted to such new securities or
consideration equal to the amount each share of LG&E Energy Common Stocknon-employee directors also received multiplied by the number of share equivalents in the stock account.

A director will be eligible to receive a distribution from his or her
account only upon termination of service by death, retirement or otherwise.
Following departure from the Board, the distribution will occur, at the
director's election, either in one lump sum or in no more than five annual
installments. The distribution will be made, at the director's election, either
in LG&E Energy Common Stock or in cash equal to the then-market price of the
LG&E Energy Common Stock allocated to the director's stock account. At February
16, 1999, eight directors of LG&E were participating in the Deferred Stock Plan.

Non-employee directors who are also directors of LG&E Energy also receive stock options pursuant to the former LG&E Energy Corp. Stock Option Plan for Non-Employee Directors (the "Directors'

Option Plan"), which was approvedDirectors. In connection with the Powergen-LG&E Energy merger, options held by LG&E Energy's shareholdersa director under this plan were converted at the 1994
Annual Meeting. Underdirector's election into either options to acquire American Depositary Shares of Powergen (at an agreed upon exchange ratio) or cash and the termsplan was terminated.
As noted earlier, since the completion of the Directors' Option Plan, upon initial
election or appointment toPowergen-LG&E Energy merger, certain current members of the LG&E Energy Board, each new director, who has not
been an employee or officer of LG&E Energy within the preceding three years,
receives an option grant for 4,000 shares of LG&E Energy Common Stock. Following
the initial grant, eligible directors receive an annual option grant of 4,000
sharesand KU boards serve on the first WednesdayBoard of each February. Option grantsDirectors of Powergen plc. In that capacity, these members received or will receive certain compensation during 2000 and 2001. Information regarding such compensation is incorporated by reference from Powergen's Annual Report on Form 20-F for 1994-1996 were
for 2,000 shares, all of which were adjusted in April 1996 to reflect a
two-for-one stock split. The option exercise price per share for each share of
LG&E Energy Common Stock is the fair market value at the time of grant. Options
granted are not exercisable during the first twelve months from the date of
grant and will terminate 10 years from the date of grant. In the event of a
tender offer or an exchange offer for shares of LG&E Energy Common Stock, all
then exercisable, but unexercised options granted under the Directors' Option
Plan will continue to be exercisable for thirty days following the first
purchase of shares pursuant to such tender or exchange offer.

The Directors' Option Plan authorizes the issuance of up to 500,000 shares
of LG&E Energy Common Stock, of which 251,000 shares are subject to existing
options at a weighted average per share price of $22.83. As of February 16,
1999, each non-employee director held 20,000 exercisable options and 4,000
unexercisable options to purchase LG&E Energy Common Stock,year ended December 31, 2000 as filed with the exception
of Dr. SwainSecurities and Mr. Grade, who held 16,000 and 8,000 exercisable options,
respectively, and 4,000 unexercisable options each, and Messrs. Gatton, Ramsey
and Rouse, Mrs. Ball and Drs. Shearer and Todd, who each held 4,000 exercisable
and 4,000 unexercisable options. The number of shares subject to the Directors'
Option Plan and subject to awards outstanding under the plan will adjust with
any stock dividend or split, recapitalization, reclassification, merger,
consolidation, combination or exchange of shares, or any similar corporate
change.

AUDIT COMMITTEEExchange Commission.
Audit Committee
The Audit Committee of the Board is composed of Messrs. Ballard, Brown,
Gatton, Grade, Grissom, LewisMr. Sydney Gillibrand and Ramsey, Mrs. Ball and Drs. Shearer and Todd.Sir Frederick Crawford, with one vacancy. During 1998,2000, the Audit Committee maintained direct contact with the
5
independent auditors and LG&E's and KU's Internal Auditor to review the following matters pertaining to LG&E and to LG&E Energy and its subsidiaries, including KU: the adequacy of accounting and financial reporting procedures; the adequacy and effectiveness of internal accounting controls; the scope and results of the annual audit and any other matters relative to the audit of these companies' accounts and financial affairs that the Committee, the Internal Auditor, or the independent auditors deemed necessary. The Audit Committee met threetwo times during 1998.

COMPENSATION COMMITTEE2000.
Remuneration Committee
The CompensationRemuneration Committee, composed of non-employee directors, approveshas succeeded to certain of the functions performed by the former Compensation Committee in connection with the compensation of the Chief Executive Officer and the executive officers of LG&E
Energy, LG&E and KU. The Committee makes recommendations to the full Board regarding benefits provided to executive officers and the establishment of various employee benefit plans. The membersDr. David K-P Li is the current member of the Compensation Committee are
Messrs. Gatton, Grade, Grissom, Morton, Ramsey and Rouse and Mrs. McNamara.Remuneration Committee. The former Compensation Committee met fivethree times during 1998.

NOMINATING AND GOVERNANCE COMMITTEE

The Nominating and Governance Committee is composed of the Chairman of the
Board and certain other directors. The Committee reviews and recommends to the
Board of Directors nominees to serve on the Board and their compensation. The
Committee considers nominees suggested by other members of the Board, by members
of management and by shareholders. To be considered for inclusion in the slate
of nominees proposed by the Board of Directors at an annual meeting, shareholder
recommendations must be submitted in writing to the Secretary of LG&E not later
than 120 days prior to the Annual Meeting. In addition, the Articles of
Incorporation and bylaws of LG&E contain procedures governing shareholder
nominations for election of directors at a shareholders'

meeting. The Chairman of the Annual Meeting may refuse to acknowledge the
nomination of any person not made in compliance with these procedures. The
members of the Nominating and Governance Committee are Messrs. Ballard, Brown,
Hale (ex officio), Lewis, Ramsey and Rouse, Mrs. Ball and Mrs. McNamara and Dr.
Shearer. The Nominating and Governance Committee met two times during 1998.

LONG-RANGE PLANNING COMMITTEE

The Long-Range Planning Committee is composed of Messrs. Grade, Grissom,
Lewis, Morton, Rouse and Todd, Mrs. Ball and Mrs. McNamara and Dr. Shearer. The
Long-Range Planning Committee considers and makes recommendations to the Board
regarding LG&E's future strategy and direction, long-term goals and other
matters of long-term importance. The Long-Range Planning Committee did not meet
during 1998.

2000.
6
PROPOSAL NO. 2
APPROVAL OF INDEPENDENT AUDITORS FOR 19992001
Based upon the recommendation of the Audit Committee, the Board of Directors, subject to ratification by shareholders, has selected Arthur AndersenPricewaterhouseCoopers LLP as independent auditors to audit the accounts of LG&E Energy and LG&E for the fiscal year ending December 31, 1999. Arthur Andersen2001. PricewaterhouseCoopers has audited the accounts of LG&EPowergen for many years (as welland effective April 30, 2001, following the completion of the Powergen-LG&E Energy merger in December 2000, the firm was selected as thoseindependent auditors for the Company. The Board of KU),Directors and Audit Committee of LG&E Energy
since its organization in 1990. The shareholders previously approved the employmentselection of the firm at the Annual MeetingPricewaterhouseCoopers on May 30, 2001.
Prior to April 22, 1998.

Representatives30, 2001, Arthur Andersen LLP had served as LG&E's independent auditors. The reports of Arthur Andersen LLP willon LG&E's financial statements for the two years ended December 31, 2000 and 1999 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of LG&E's financial statements for each of the years ended December 31, 2000 and 1999, and through April 30, 2001, there were no disagreements with Arthur Andersen LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which, if not resolved to the satisfaction of Arthur Andersen LLP, would have caused the firm to make reference to the matter in their reports.
Representatives of PricewaterhouseCoopers LLP and Arthur Andersen LLP may be present at the Annual
Meeting. Such representativesannual meeting and available to respond to questions and will be given the opportunity to make a statement, if they so desire, and will be available to respond to appropriate questions.desire.
As previously stated, LG&E Energy intends to vote all of the outstanding shares of common stock of the Company in favor of approval of the appointment of Arthur AndersenPricewaterhouseCoopers LLP as independent auditors, and since LG&E Energy's ownership of such common stock represents over 96% of the voting power of the Company, the approval of such independent auditors is assured.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE APPOINTMENT OF THE INDEPENDENT AUDITORS.

10
7

REPORT OF THE COMPENSATIONREMUNERATION COMMITTEE
ON EXECUTIVE COMPENSATION

The
Following the December 11, 2000 completion of the merger transaction involving LG&E Energy and Powergen, a Remuneration Committee of the Boards of Directors of LG&E and KU (collectively, the "Companies") was established to succeed to certain of the relevant duties formerly performed by the Compensation Committee of the Board of Directors isof the Companies. This report describes actions taken by the former Compensation Committee as constituted during 2000. The current Remuneration Committee does not include any individuals who were previously on the Compensation Committee.
The former Compensation Committee was comprised wholly of non-employee directors of LG&E Energy, LG&E and makesKU and made all decisions regarding the compensation of LG&E Energy's, LG&E's and KU's executive officers, including the setting of base pay and the administration of LG&E Energy's Omnibus Long-Term Incentive Plan (the "Long-Term Plan") and Short-Term Incentive Plan (the "Short-Term Plan"), each as defined herein. The Company'scurrent Remuneration Committee is comprised entirely of non-employee directors of LG&E, KU and Powergen.
The Companies' executive compensation program and the target awards and opportunities for executives are designed to be competitive with the compensation and pay programs of comparable companies, including utilities, utility holding companies and companies in general industry nationwide. The executive compensation program has been developed and implemented over time through consultation with, and upon the recommendations of, nationally-recognizedrecognized executive compensation consultants. The CompensationRemuneration Committee and the Board of Directors have continued access to such consultants as desired, and are provided with independent compensation data for their review.

LG&E is a principal subsidiary of LG&E Energy. As noted above, the members
of the Compensation Committee and Board of Directors of LG&E also serve in the
same capacity for LG&E Energy. Certain executive officers of LG&E are also
executive officers of LG&E Energy. For those individuals references below to the
Compensation Committee and Board of Directors refer to the Compensation
Committee and Board of Directors of both LG&E and LG&E Energy unless otherwise
indicated, and discussions of their compensation include compensation earned for
services to both LG&E and LG&E Energy.
Set forth below is a report submitted by
the members of the Compensation Committee addressing LG&E Energy's&E's compensation policies during 19982000 for its officers, of LG&E and LG&E Energy, including the executive officers named in the following tables. TheIn many cases, the executive officers also serve in similar capacities for affiliates of LG&E, including LG&E Energy and KU. For each of the executive officers of LG&E participate inand KU, the Long-Term Planpolicies and Short-Term Plan of LG&E Energy. References
to stock, shareholder performance or shareholder return relateamounts discussed below are for all services to LG&E, Energy
Common Stock.

COMPENSATION PHILOSOPHY

There are three major components ofKU and their affiliates.
Compensation Philosophy
During 2000, LG&E's executive compensation program:program had three major components: (1) base salary; (2) short-term or annual incentives; and (3) long-term incentives. LG&EThe Companies developed itstheir executive compensation program to focus on both short-term and long-term business objectives that are designed to enhance overall shareholder value. The short-term and long-term incentives arewere premised on the belief that the interests of executives should be closely aligned with those of LG&E Energy's shareholders.shareholders. Based on this philosophy, these two portions of each executive's total compensation package arewere placed at risk and arewere linked to the accomplishment of specific results that arewere designed to benefit LG&E Energy's shareholders in both the short-term and long-term. Under this pay-for-performance approach, a highly competitive level of compensation cancould be earned in years of strong performance. Conversely, in years of below-average performance, compensation maymight decline below competitive benchmarks.
The executive compensation program also recognizesrecognized that LG&E and LG&E
Energy'sthe Companies' compensation practices must be competitive not only with utilities and utility holding companies, but also with companies in general industry to ensure that a stable and successful management team can be recruited and retained. The Compensation Committee believesbelieved that the Company'sCompanies' most direct competitors for executive talent are not limited to the companies that would be included in the utility industry index against which shareholder returns may be compared. For this reason, the various compensation peer groups as establisheddiscussed below, arewere not the same as the utility industry index in the Comparison of Five-Year Total Return graph included on page 16 ofin this proxy statement.
8
Pursuant to this competitive market positioning philosophy, in establishing compensation levels for all executive positions for 1998,2000, the former Compensation Committee reviewed competitive compensation information for general industry companies with revenue between $2 - $3$2—$4 billion (the "Survey

11
Group") and established targeted total direct compensation (base salary plus short-term incentives and long-term incentives) for each executive for 19982000 to approach the 50th percentile of the competitive range from the Survey Group. Salaries, short-term incentives and long-term incentives for 19982000 are described below.
The 19982000 compensation information set forth in other sections of this proxy statement, particularly with respect to the tabular information presented, reflects the considerations set forth in this report. The Base Salary, Short-Term Incentives, and Long-Term Incentives sections that follow address the compensation philosophy for 19982000 for all executive officers except for Mr. Roger W. Hale. Mr. Hale's compensation iswas determined in accordance with the terms of his employment agreement (See "Chief Executive Officer Compensation" on page 14
of this proxy statement for a description of his 19982000 compensation). Pursuant to
the terms of existing employment and change in control agreements, severance
amounts were paid to certain departing executives during 1998. See "Employment
Contracts and Termination of Employment Arrangements and Change in Control
Provisions" on page 21 of this proxy statement.

BASE SALARY
Base Salary
The base salaries for LG&E executive officers for 19982000 were designed to be competitive with the Survey Group at approximately the 50th percentile of the base salary range for executives in similar positions with companies in the Survey Group. Actual base salaries were determined based on individual performance and experience.

SHORT-TERM INCENTIVES

In
Short-Term Incentives
The Short-Term Plan provided for Company Performance Awards and Individual Performance Awards, each of which was expressed as a percentage of base salary and each of which was determined independent of the first quarter of 1998, theother. The former Compensation Committee established the performance goals for the Company Performance Awards and Individual Performance Awards.Awards at the beginning of the 2000 performance year. Payment of Company Performance Awards for executive officers was based 100% on Net Income Available for Common Stock ("NIAC"), while paymentincluding certain adjustments deemed appropriate by the Committee. Payment of Individual Performance Awards was based 100% on Management Effectiveness, which includes a customer satisfaction element for certain participants. AtThe awards varied within the beginning of the
third quarter, the Compensation Committee established revised performance goals
to reflect the fundamental business shifts effected by LG&E Energy during 1998,
particularly the decision to discontinue merchant energy marketing and trading
operations and the completion of the KU Merger and the Big Rivers leasing
transactions. For participants with performance goalsexecutive officer group based upon LG&E Energy
Corp. and LG&E Energy Marketing performance measures, the Compensation Committee
determined that no Company Performance Awards would be payable with respect to
first and second quarter operations and results. Revised Company Performance
Award targets for July through December 1998 were established based upon LG&E
Energy's revised plannature of continuing business operations foreach individual's functional responsibilities.
For 2000, the third and fourth
quarters of the year.

For 1998, the revised Company Performance Award targets for executive officers ranged from 21% to 30%36% of base salary, and the Individual Performance Award targets ranged from 14% to 20%24% of base salary. Both awards were established to be competitive with the 50th percentile of such awards granted to comparable executives employed by companies in the Survey Group. The individual officers were eligible to receive from 0% to 175% of their targeted amounts, dependent upon Company and individual performance during 19982000 as measured by NIAC with regard to Company Performance Awards, and were eligible to receive from 0% to 175% of their targeted amounts dependent upon individual performance as measured by Management Effectiveness with regard to Individual Performance Awards. As indicated above, no
Using LG&E Energy and subsidiaries performance to date, in December 2000, in connection with the pending completion of the LG&E Energy-Powergen merger, the former Compensation Committee determined and established projected annual performance against targets for Company Performance Awards were paid
in respect of firstAwards. Effective with the merger, the Short-Term Plan was then terminated and, second quarter operations or results for participants
withusing the projected performance, goals based upon LG&E Energy Corp. and LG&E Energy Marketing
performance measures. Based upon performances against the revised targets for
the second-half of 1998, payouts of Company Performance Awards for 19982000 to the executive officers rangedwere paid ranging from 9%24.7% to 33%45%, of base salary. Payouts for the Individual Performance Awards to the executive officers ranged from 20%25% to 35%42%, of base salary.

LONG-TERM INCENTIVES

The
Long-Term Incentives
Pursuant to its terms, the Long-Term Plan iswas administered by a committee of not less than three non-employee directors of LG&E Energy who arewere appointed by the LG&E Energy Board of Directors. At this time,Directors. During 2000, the
9
Compensation Committee administers the Long-Term
Plan.performed this function. The Long-Term Plan providesprovided for the grant of any or all of the following types of awards: stock options, stock appreciation rights, restricted stock, performance units and performance shares. In 1998,2000, the former Compensation Committee chose to award stock options and performance units to executive officers.
The Compensation Committee determined the competitive long-term grants to be awarded for each executive based on the long-term awards for the 50th percentile of the Survey Group. The aggregate expected value of the stock options and performance units (delivered 50%approximately 40% in the form of performance units and 50%60% in the form of nonqualified stock options in 1998)2000) was intended to approach the expected value of long-term incentives payable to executives in similar positions with companies in the 50th percentile of the Survey Group, depending upon achievement of targeted Company performance.
Stock options were granted to executive officers and senior management during the first quarter of 19982000 at an exercise price equal to the fair market value at the time of grant and were subject to a one-year vesting requirement. During the year, newly hired or promoted officers were also eligible to receive pro-rated stock option grants under the Long-Term Plan. Since options were granted with an exercise price equal to the market value of the Common StockLG&E Energy's common stock at the time of grant, they provideprovided no value unless LG&E Energy's stock price increasesincreased after the grants are awarded. Once the options vest,vested, they arewere exercisable over a nine-year term. These awards arewere thus tied to stock price appreciation in excess of the stock's value at time of grant, rewarding executives as if they shared in the ownership of LG&E Energy. The estimated number of shares subject to options was determined by taking the expected value to be provided in options, as determined above, and dividing that amount by the estimated current value of an option using a variation of the Black-Scholes Option Pricingoption pricing methodology provided by the outside compensation consultant. Prior awards were not considered when making new grants. The actual number of options granted were then determined by approximating the average by officer level within LG&E Energy. Pursuant to the Plan's provisions, all outstanding options vested in June 2000 upon shareholder approval of the LG&E Energy-Powergen merger. At the time of the merger, all outstanding options were converted, at the election of the holder, into options to acquire Powergen ADRs or cash based upon the difference between the option exercise price and the per share merger consideration amount.
The number of performance units granted was determined by taking the amount of the executive's long-term award to be delivered in performance units (adjusted on a present value basis), as determined above, and dividing that amount by the fair market value of LG&E Energy Common Stockcommon stock on the date of the grant. The future value of the performance units iswas substantially dependent upon the changing value of LG&E Energy's Common Stockcommon stock in the marketplace. Each executive officer iswas entitled to receive from 0% to 150% of the performance units contingently awarded to the executive based on LG&E Energy's total shareholder return over a three-year period (defined as share price increase plus dividends paid, divided by share price at beginning of the period) measured against the total shareholder return for such period ("TSR") by a peer group selected by the Committee. The peer group for measuring LG&E Energy's TSR performance (the "Long-Term Plan Peer Group") consistsconsisted of approximately 80 utility holding companies and gas and electric utilities.(1)

Payouts of long-term incentive awards in February 1999 were based on LG&E
Energy's performance during the 1996-1998 period. During such period, LG&E
Energy's performance was at the 63rd percentile of its comparison group with
respect to TSR, resulting in payouts of 125% of the contingent awards. The
performance units are payable 50% in LG&E Energy Common Stock and 50% in cash.

- ------------------------

(1) ¹
¹
While similar, the utilities and holding companies that arewere in the Long-Term Plan Peer Group arewere not necessarily the same as those in the Standard & Poor's Utility Index used in the Company Performance Graph on
page 16 of the proxy statement or the Survey Group. Nevertheless, in the judgment of the Compensation Committee, the companies in the Long-Term Plan Peer Group continue to representrepresented the appropriate peer group for performance unit compensation purposes.

Long-term incentive
Pursuant to the change in control provisions of the Long-Term Plan, payouts of the three open performance period awards were also paid to certain former KU officers in
February 1999 in respect of KU's performance during the 1996-1998 period under the KU Performance ShareLong-Term Plan (the "KU Plan"). Payouts were made at 100%occurred in June 2000 upon shareholder approval of contingent grants, based upon the Compensation Committee's assessment of KU's
performance during 1998 and KU's contribution to strong LG&E Energy performance
followingEnergy-Powergen merger and the Merger.amounts are included in the column "LTIP Payments" in the Summary Compensation Table below. These payouts were made inbased on LG&E Energy Common Stock to
four executive officersEnergy's performance through that time for each of the Company who were participantspartially completed 1998-2000, 1999-2001 and 2000-2002 performance
10
periods, respectively. For such periods, LG&E Energy's performance was at the 57^th, 46^th, and 97^th percentiles, respectively, of its comparison group with respect to TSR.
Other
In connection with the LG&E Energy-Powergen merger, Messrs. Staffieri, McCall and Newton entered into revised employment and severance agreements. These agreements are discussed under "Employment Contracts and Termination of Employment Arrangements and Change in Control Provisions". In consideration for the cancellation of their prior agreements, the officers received payments described in that section. These payments are included in the KU Plan
prior"All Other Compensation" column in the Summary Compensation Table. Mr. Duncan, who resigned effective January 31, 2001, did not receive a payment at the time of the merger, but received a payment of $2,017,683 in January 2001 pursuant to the Merger.

CHIEF EXECUTIVE OFFICER COMPENSATIONterms of his existing change in control and non-disclosure and confidentiality agreements.
Chief Executive Officer Compensation
The compensation of Mr. Roger W. Hale, the Chief Executive Officer of LG&E and LG&E Energy, Mr.
Roger W. Hale, isduring 2000, was governed by the terms of an employment agreement. Following commencement of his service with LG&E in April 1989, Mr. Hale's employment agreement has been periodically updated by the Board to recognize his fundamental role in establishing LG&E Energy as a national and international diversified energy services company. Mr. Hale's 19971998 employment agreement (the "1997"1998 Agreement") wasprovided for a five year term ending on May 4, 2003. As part of the LG&E Energy-Powergen merger, Powergen, LG&E Energy and Mr. Hale entered into a new employment agreement dated February 25, 2000 (the "2000 Agreement") which became effective duringon December 11, 2000 at the periodeffective time of the LG&E Energy-Powergen merger. In consideration for the cancellation of his 1998 priorAgreement and associated change in control provisions, Mr. Hale received a payment equal to the May 4,
1998 closing ofseverance benefits he would have been entitled to if he had terminated his employment following the Merger. A revised employment agreement (the "Revised
Agreement") became effective upon such date and throughoutmerger. This payment is included in the remainder of
1998."All Other Compensation" column in the Summary Compensation Table. (See "Employment Contracts and Termination of Employment Arrangements and Change in Control Provisions" on page 21 of this proxy statement..)
The 1997 Agreement and the Revised1998 Agreement established the minimum levels of Mr. Hale's 1998 and post-merger2000 compensation, although the former Compensation Committee retained discretion to increase such compensation. For 1998,2000, the Compensation Committee compared Mr. Hale's compensation to that of chief executive officers of companies contained in the Survey Group as well asincluding electric and gas utilities and utility holding companies with comparable revenues, market capitalization and asset size. In setting long-term awards, the CompanyCompanies also considered survey data from various compensation consulting firms. Mr. Hale also receives LG&E Energyreceived Companies' contributions to the savings plan, similar to those of other officers and employees. Details of Mr. Hale's 19982000 compensation are set forth below.

BASE SALARY.
Base Salary. Mr. Hale was paid a total base salary of $700,000$816,200 during 1998.2000. This amount was based upon the minimum salary amount provided in the 19971998 Agreement, plus an increaseprior increases awarded by the Compensation Committee. The Compensation Committee, in determining Mr. Hale's annual salary, including increases, focused on his individual performance (including his management effectiveness, as described below), the growth of LG&E Energy and the compensation provided to other LG&E Energy, LG&E and KU officers. The 19982000 increase, granted in February 2000, was 20.7%

SHORT-TERM INCENTIVES.6%.
Short-Term Incentives. Mr. Hale's target short-term incentive award was 65%70% of his 19982000 base salary. Like allAs with other executive officers receiving short-term incentive awards, Mr. Hale was eligible to receive more or less than the targeted amount, based on Company performance and individual performance. His 19982000 short-term incentive payouts were based 70%60% on Company Performance Goals
and 30% on Individual Performance Goals.

In 1998, noachievement of Company Performance Award was paid to Mr. Hale in respecttargets and 40% on achievement of first and second quarter operations or results. HisIndividual Performance Award targets.
For 2000, the Company Performance Award payout for performance against the revised targets for the third and fourth
quartersMr. Hale was 23%49.5% of his 19982000 base salary. Mr. Hale'ssalary and the Individual Performance Award payout was 34%45% of his 19982000 base salary. Thesalary. As with the other executive
11
officers, in connection with the LG&E Energy-Powergen merger, the Company Performance Award was calculated based upon projected annual Company performance as described under the heading "Short-Term Incentives." In determining the Individual Performance Award, the Compensation Committee considered Mr. Hale's effectiveness in several areas in determiningincluding the final
Individual Performance Award. These included the financial and operational performance of LG&E Energy, LG&E, KU and other LG&E Energy subsidiaries, Company growth, customer satisfaction ratings, Company growth and other measures, such as LG&E Energy'sthe successful negotiation and completion of the leasingLG&E Energy-Powergen transaction, with Big Rivers.as well as other measures.
Long-Term Incentive Grant. In May 1998, the
Compensation Committee awarded Mr. Hale a special completion bonus of $250,000
as reward for his leadership role and contribution upon the successful closing
of the KU Merger. (See statement "Short-Term Incentives" on page 12 of this
proxy statement for a discussion of the revised Company Performance Award
targets).

LONG-TERM INCENTIVE GRANT. In 1998,2000, Mr. Hale received 133,588190,000 options and 39,24455,307 performance units for the 1998-20002000-2002 performance period. These amounts were determined in accordance with the terms of his 19971998 Agreement and were expected to provide
expected value representing approximately 150%175% of his base salary. The terms of the options and performance units (including the manner in which performance units are earned) for Mr. Hale arewere the same as for other executive officers, as described under the heading "Long-Term Incentives."

LONG-TERM INCENTIVE PAYOUT. In
Long-Term Incentive Payout. As with other executive officers, in connection with the 1996-1998 period,LG&E Energy-Powergen merger, Mr. Hale's Company Performance Awards were calculated based upon LG&E Energy's performance during the partially completed 1998-2000, 1999-2001 and 2000-2002 periods, respectively, as described under the heading "Long-Term Incentives." For such periods, LG&E Energy's performance was at the 63rd percentile57th, 46th, and 97th, percentiles, respectively, of its comparison group in TSR. That
resulted in a payout equal to 125% of the approved target. In addition, the
market value per share of LG&E Energy Common Stock increased from $21.22 at
grant to $28.31 during the performance period. This further increased the value
of the payout of the performance units originally awarded to Mr. Hale in 1996.

TAX MATTERS

Section 162(m) of the Code was enacted in 1993 and generally prohibits the
Company from deducting executive compensation in excess of $1,000,000.
Qualifying "performance based compensation" is not subject to this deduction
limitation if certain requirements are satisfied. It is the Compensation
Committee's general intent to preserve the deductibility of executive
compensation to the extent reasonably practicable and to the extent consistent
with its other compensation objectives. In an effort to ensure that certain
compensation payable under the Long-Term Plan and Short-Term Plan remain
deductible, the Compensation Committee and the Board of Directors recommended,
and the shareholders approved, modification of the Long-Term Plan and adoption
of a new Short-Term Plan in 1996, although not all of the compensation paid to
executive officers under these two plans constitutes performance based
compensation. A portion of compensation received by Mr. Hale in 1998 was not
deductible.

CONCLUSION

The Compensation Committee believes that the Company's executive
compensation system served the interests of the Company and its shareholders
effectively during 1998. The Compensation Committee takes very seriously its
responsibilities with respect to the Company's executive compensation system,
and it will continue to monitor and revise the compensation policies as
necessary to ensure that the Company's compensation system continues to meet the
needsTSR.
Member of the Company and its shareholders.

MEMBERS OF THE COMPENSATION COMMITTEE

J.Remuneration Committee
Dr. David Grissom, Chairman
Carol M. Gatton
Jeffery T. Grade
Anne H. McNamara
T. Ballard Morton, Jr.
Frank V. Ramsey, Jr.
William L. Rouse, Jr.

15
K-P Li
12
COMPANY PERFORMANCE
All of the outstanding Common Stock of LG&E is owned by LG&E Energy and, accordingly, there are no trading prices for LG&E's Common Stock. All of the common stock of LG&E Energy is indirectly owned by Powergen plc. The following graph reflects a comparison of the cumulative total return (change in stock price plus reinvested dividends) to shareholdersholders of LG&E Energy Common StockAmerican Depositary Shares ("ADS's") of Powergen plc from December 31, 1993,1995, through December 31, 1998,2000, with the Standard & Poor's 500 Composite Index and the Standard & Poor's Utility Index. The comparisons in this table are required by the Securities and Exchange Commission and, therefore, are not intended to forecast or be indicative of possible future performance of LG&E Energy Common Stock.

EDGAR REPRESENTATIONADS's of Powergen.
COMPARISON OF DATA POINTS USED IN PRINTED GRAPHIC

INDEXED RETURNS

YEARS ENDING
TOTAL SHAREHOLDER RETURNS
LG&E Energy Corp S&P Utilities S&P 500 Index
Dec-93 100.00 100.00 100.00
Dec-94 96.37 92.06 101.32
Dec-95 116.63 130.74 139.40
Dec-96 142.11 134.83 171.40
Dec-97 151.31 168.07 228.59
Dec-98 180.46 192.89 293.91
12/31/1993 1994 1995 1996 1997 1998
LG&E ENERGY $100 $96 $117 $142 $151 $180
S&P UTILITIES $100 $92 $131 $135 $168 $193
S&P 500 $100 $101 $139 $171 $229 $294

- ------------------------FIVE YEAR CUMULATIVE
TOTAL SHAREHOLDER RETURN (1)
(1)
Total Shareholder Return assumes $100 invested on December 31, 1993,1995, with
quarterly reinvestment of dividends.

16
13
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table shows the cash compensation paid or to be paid by LG&E or LG&E Energy, and any of its subsidiaries including KU, as well as certain other compensation paid or accrued for those years, to the Chief Executive Officer and the next four highest compensated executive officers of LG&E who were serving as such at December 31, 1998,2000, as required, in all capacities in which they served LG&E Energy or its subsidiaries during 1996, 19971998, 1999 and 1998:

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION AWARDS
----------------------------------- ----------
OTHER SECURITIES PAYOUTS
ANNUAL UNDERLYING -------- ALL OTHER
COMPEN- OPTIONS/ LTIP COMPEN-
NAME AND SALARY BONUS SATION SARS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) (#)(3) ($) ($)
- -------------------------------------------------- ---- ------------ -------- --------- ---------- -------- -----------

Roger W. Hale 1998 $ 700,000 $649,800 $32,301 133,588 $821,581 $ 36,191(1)
Chairman of the Board 1997 580,000 311,808 18,212 67,728 313,037 26,675
and Chief Executive Officer 1996 510,000 416,068 11,010 55,000 641,092 26,909

Victor A. Staffieri 1998 300,000 150,461 10,269 45,802 166,611 15,590(1)
Former Chief Financial Officer 1997 270,000 159,064 8,063 27,946 57,416 10,635
(Currently President and Chief 1996 245,000 175,310 7,431 26,022 124,950 9,336
Operating Officer of LG&E Energy)

Stephen R. Wood 1998 265,000 120,711 7,373 42,799 94,543 13,377(1)
President, Louisville Gas and Electric 1997 245,000 138,039 6,849 15,605 32,306 8,721
Company and President-Distribution 1996 226,000 106,256 7,082 14,772 67,130 7,877
Services Division of LG&E Energy

John R. McCall 1998 260,000 140,399 7,870 34,733 96,635 15,582(1)
Executive Vice President, 1997 245,000 114,764 6,922 15,605 32,306 11,414
General Counsel and Corporate Secretary 1996 231,000 112,303 7,230 15,098 35,868 11,029

Wayne T. Lucas 1998 167,500(2) 138,449 39,773(2) 23,028 0 7,037(1)
Executive Vice President--
Power Generation

- ------------------------

2000:

2000 Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards
Payouts
Other
Annual
Comp.
($) Restricted
Stock
Awards
($) All Other
Compen-
sation
($)
Name and
Principal Position Year Salary
($) Bonus
($) Securities
Underlying
Options/SARs (#) LTIP
Payouts
($)(1)
Roger W. Hale
Chairman of the Board and
Chief Executive Officer(5) 2000
1999
1998 816,200
770,000
700,000 803,761
703,800
649,800 3,546,581
47,599
32,301 (2)

—
2,919,489
—
(4)
190,000
102,122
133,588 3,870,758
0
821,272 5,085,473
55,596
36,191 (3)

Victor A. Staffieri
President and Chief
Operating Officer(5)
2000
1999
1998
460,000
400,000
300,000
388,277
324,600
150,461
24,247
22,730
10,269
262,880
—
—
(6)

90,000
53,050
45,802
1,051,694
0
166,611
640,160
20,604
15,590
(3)

John R. McCall
Executive Vice President,
General Counsel and
Corporate Secretary
2000
1999
1998
325,000
300,000
260,000
228,605
204,930
140,399
18,177
7,171
7,870
172,028
—
—
(6)

40,000
31,830
34,733
570,565
0
96,635
677,097
17,252
15,582
(3)

Frederick J. Newton III
Senior Vice President and
Chief Administrative
Officer
2000
1999
1998
272,000
255,000
217,100
191,325
171,641
99,253
14,970
6,731
69,229
143,974
—
—
(6)

30,000
12,219
14,875
356,334
0
—
814,961
8,712
3,328
(3)

R. Foster Duncan
Executive Vice President
And Chief Financial
Officer (7)
2000
1999
1998
342,000
325,000
262,903
240,563
215,788
210,000
29,240
52,440
69,687

(8)
—
—
—
60,000
34,483
81,221
720,730
0
—
24,596
15,623
4,785
(3)

(1)
Year 2000 amounts reflect acceleration of the 1998-2000, 1999-2001 and the 2000-2002 open cycles upon a change in control event as defined in the plan as a result of the LG&E Energy-Powergen merger. Due to Company stock performance compared to peer group, no Long-Term Plan payouts were made for 1997-1999 performance cycle. The 1998 amounts reflect the payment of the 1996-1998 award.

(2)
Other Annual Compensation includes $63,693 for business spousal travel and personal use of corporate aircraft, and $3,470,524 in tax gross-up.

(3)
Includes employer contributions to 401(k) plan, nonqualified thrift plan, and
employer paid life insurance premiums, and retention/termination payments in 19982000 as follows: Mr. Hale $4,375,
$16,625$4,910, $40,690, $32,950 and $15,191,$5,006,923, respectively; Mr. Staffieri $4,875, $8,897$5,018, $30,129 $4,973 and $1,818,$600,000, respectively; Mr. Wood $4,117, $7,975Duncan $5,018, $18,843, $735 and $1,286,$0, respectively; Mr. McCall $4,318, $6,925$5,115, $17,642, $4,340 and $4,340,$650,000, respectively; and Mr. Lucas, $2,337, $0Newton $4,003, $9,896, $1,062 and $4,700,$800,000, respectively. (2) The retention/termination payments are discussed in "Employment Contracts and Termination of Employment Arrangements and Change in Control Provisions".

(4)
Amount shown represents dollar value of restricted stock awards, determined by multiplying the number of shares by the closing market price as of the receipt date of grant. After the effective date of the LG&E Energy-Powergen merger, pursuant to his 2000 Agreement, Mr. Hale's 147,382 restricted
14
shares were converted to receive the merger consideration of $24.85 per share payable in respect of all outstanding shares of former LG&E Energy Common Stock. Income tax was payable upon the awards at the time of the satisfaction of this right.
(5)
Titles are given as of December 31, 2000. Mr. Hale retired as Chairman of the Board and Chief Executive Officer on April 30, 2001 and was succeeded on that date by Mr. Staffieri as Chairman of the Board, President and Chief Executive Officer.

(6)
Amount shown represents the dollar value of restricted Powergen ADR awards, determined by multiplying the number of ADRs in each award by the closing market price as of the effective date of the LG&E Energy-Powergen merger. These awards do not represent currently-realizable compensation to Mr. Staffieri, Mr. McCall, and Mr. Newton. Pursuant to the terms of the named executives' employment agreements, the restricted Powergen ADRs are forfeitable upon termination of employment prior to 18 months, without good reason or for cause. Dividends on the restricted ADRs are payable upon vesting, without interest. At December 31, 2000, the restricted ADR holdings were Mr. Staffieri 7,688 ADRs ($303,215), Mr. McCall 5,031ADRs ($198,423) and Mr. Newton 4,211 ADRs ($166,082), respectively.

(7)
Mr. Duncan resigned from service effective January 31, 2001.

(8)
Reported compensation is only for a portion of the year. Mr. LucasDuncan joined LG&E Energy on May 4,January 12, 1998. (3) As adjusted"Other Annual Compensation" for the 2 for 1 stock split effective in April 1996.

17
that year includes a relocation payment of $68,686.
15
OPTION/SAR GRANTS TABLE
OPTION/
Option/SAR GRANTS IN 1998 FISCAL YEARGrants in 2000 Fiscal Year
The following table contains information at December 31, 1998,2000, with respect to grants of former LG&E Energy common stock options and stock appreciation rights (SARs) to the named executive officers:
INDIVIDUAL GRANTS POTENTIAL
------------------------------------ REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL
SECURITIES TOTAL RATES OF STOCK
UNDERLYING OPTIONS/SARS EXERCISE PRICE APPRECIATION
OPTIONS/SARS GRANTED TO OR BASE FOR OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION -----------------------------------
NAME (#) (1) FISCAL YEAR ($/ SHARE) DATE 0%($) 5%($) 10%($)
- ------------------- --------------- ------------------- ----------- ------------ ------ --------- ---------

Roger W. Hale 133,588 16.8% 23.47 02/04/2008 0 1,971,780 4,996,877
Victor A. Staffieri 45,802 5.8% 23.47 02/04/2008 0 676,045 1,713,230
Stephen R. Wood 35,401 4.4% 23.47 02/04/2008 0 522,524 1,324,179
Stephen R. Wood 7,398 0.9% 24.63 02/04/2008 0 114,593 290,400
John R. McCall 34,733 4.4% 23.47 02/04/2008 0 512,665 1,299,193
Wayne T. Lucas 23,028 2.9% 26.50 05/04/2008 0 383,778 860,876

- ------------------------

Name Number of
Securities
Underlying
Options/SARs
Granted (#)
(1) Percent of
Total
Options/SARs
Granted to
Employees in
Fiscal Year Exercise
Or Base
Price
($/Share) Expiration
Date 0%($) 5%($) 10%($)
Roger W. Hale 190,000 21.6 % 16.94 02/02/2010 0 2,024,160 5,129,619
Victor A. Staffieri 90,000 10.2 % 16.94 02/02/2010 0 958,813 2,429,820
John R. McCall 40,000 4.5 % 16.94 02/02/2010 0 426,139 1,079,920
Frederick J. Newton 30,000 3.4 % 16.94 02/02/2010 0 319,604 809,940
R. Foster Duncan 60,000 6.8 % 16.94 02/02/2010 0 639,208 1,619,880
(1) Options are
Former LG&E Energy common stock options were awarded at fair market value at time of grant; unless otherwise
indicated,grant. In connection with the LG&E Energy-Powergen merger, these options vest in one year andwere converted into options to acquire Powergen ADRs. The table above sets forth information concerning these options prior to their eventual conversion. The options are exercisable over a ten-year term.

term from their original grant date.
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
AGGREGATED OPTION/
Aggregated Option/SAR EXERCISES IN 1998 FISCAL YEAR
AND FY-END OPTION/Exercises in 2000 Fiscal Year
And FY-End Option/SAR VALUESValues
The following table sets forth information with respect to the named executive officers concerning the exercise and cashout of LG&E Energy common stock options and/or SARs during 19982000 and the value of unexercised Powergen ADR options and SARs held by them as of December 31, 1998:

NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS OPTIONS/SARS AT
ON VALUE AT FY-END (#) FY-END ($)(1)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------- -------- -------- ------------- ----------------

Roger W. Hale 29,900 $183,379 136,042/133,588 784,583/646,900
Victor A. Staffieri 0 N/A 110,536/45,802 837,050/221,796
Stephen R. Wood 0 N/A 53,407/42,799 428,596/198,672
John R. McCall 0 N/A 37,651/34,733 235,255/168,195
Wayne T. Lucas 0 N/A --/23,028 --/41,681

- ------------------------

2000:
Name Shares
Acquired On
Exercise
(#) Value
Realized
($) Number of
Securities
Underlying
Unexercised
Options/SARs
at FY-End (#)
Exercisable/Unexercisable Value of
Unexercised
In-The-Money
Options/SARs at
FY-End ($)(1)
Exercisable/Unexercisable
Roger W. Hale 459,630 2,000,789 74,864/0 322,664/—
Victor A. Staffieri 246,338 1,229,426 38,890/0 167,616/—
John R. McCall 62,046 410,832 60,235/0 363,280/—
Frederick J. Newton 30,000 237,300 27,094/0 111,154/—
R. Foster Duncan 60,000 487,350 84,819/0 530,800/—
(1)
As discussed in the prior table, as a result of the LG&E Energy-Powergen merger, outstanding LG&E Energy options were converted into options to acquire Powergen ADRs. Dollar amounts reflect market value of LG&E Energy Common StockPowergen ADRs at year-end, minus the exercise price. 18
The table above sets forth information concerning these options prior to their eventual conversion.
16
LONG-TERM INCENTIVE PLAN AWARDS TABLE
LONG-TERM INCENTIVE PLAN AWARDS IN 1998 FISCAL YEAR
Long-Term Incentive Plan Awards in 2000 Fiscal Year
The following table provides information concerning awards made in 19982000 to the named executive officers under the Long-Term Plan.
NUMBER PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
OF SHARES, OTHER PERIOD NON-STOCK PRICE BASED PLANS
UNITS OR UNTIL (NUMBER OF SHARES) (1)
OTHER MATURATION ---------------------------------------------
NAME RIGHTS OR PAYOUT THRESHOLD(#) TARGET(#) MAXIMUM(#)
- ------------------------------------ ------------- ----------------- --------------- ----------- ---------------

Roger W. Hale 39,244 12/31/2000 15,698 39,244 58,866
Victor A. Staffieri 6,728 12/31/2000 2,691 6,728 10,092
Stephen R. Wood 5,200 12/31/2000 2,080 5,200 7,800
John R. McCall 5,102 12/31/2000 2,041 5,102 7,653
Wayne T. Lucas 2,996 12/31/2000 1,198 2,996 4,494

- ------------------------

Estimated Future Payouts under
Non-Stock Price Based Plans
(number of shares)(1)
Name Number
of Shares,
Units or
Other
Rights Performance or
Other Period
Until
Maturation
Or Payout(1) Threshold(#) Target(#) Maximum(#)
Roger W. Hale 55,307 12/31/2002 22,123 55,307 82,961
Victor A. Staffieri 18,308 12/31/2002 7,323 18,308 27,462
John R. McCall 8,482 12/31/2002 3,393 8,482 12,723
Frederick J. Newton 6,004 12/31/2002 2,402 6,004 9,006
R. Foster Duncan 11,651 12/31/2002 4,660 11,651 17,477
(1) The table indicates
Pursuant to the numberterms of the awards, the performance units that areperiods were accelerated upon the change in control resulting from the LG&E Energy-Powergen merger and were paid 50% in
stock and 50% in cash at maturation.on June 7, 2000 the date of shareholder approval of the merger.
Each performance unit awarded representsrepresented the right to receive an amount payable 50% in LG&E Energy Common Stockcommon stock and 50% in cash on the date of payout, the latter portion being payable in cash in order to facilitate the payment of taxes by the recipient. The amount of the payout iswas to be determined by the then-fair market value of LG&E Energy Common Stock.common stock. For awards made in 1998,2000, the Long-TermLong- Term Plan rewardsawards were intended to reward executives on a three-year rolling basis dependent upon the total shareholder return for shareholders. The target for award eligibility requiresrequired that LG&E Energy shareholders earn a total return at a preset level in comparison to that of the utility holding companies and gas and electric utilities in the Long-Term Plan Peer Group. The Committee setsset a contingent award for each management level selected to participate in the Plan and such amount iswas the basis upon which incentive compensation iswas to be determined. Depending on the level of achievement, the participant canwould receive from zero to 150% of the contingent award amount. As a result of the LG&E Energy-Powergen merger, awards were accelerated and paid out based upon performance to that date. Payments made under the Long-Term Plan in 19982000 are reported in the summary compensation table for the year of payout.

PENSION PLANS
17
Pension Plans
The following table shows the estimated pension benefits payable to a covered participant at normal retirement age under LG&E Energy's qualified defined benefit pension plans, as well as non-qualified supplemental pension plans that provide benefits that would otherwise be denied participants by reason of certain Internal Revenue Code limitations for qualified plan benefits, based on the remuneration that is covered under the plan and years of service with LG&E LG&E Energy and its subsidiaries:

1998
2000 PENSION PLAN TABLE
YEARS OF SERVICE
------------------------------------------------------
REMUNERATION 15 20 25 30 OR MORE
- --------------- ------------ ------------ ------------ ------------

$ 100,000 $ 47,896 $ 47,896 $ 47,896 $ 55,665
$ 200,000 $ 111,896 $ 111,896 $ 111,896 $ 111,896
$ 300,000 $ 175,896 $ 175,896 $ 175,896 $ 175,896
$ 400,000 $ 239,896 $ 239,896 $ 239,896 $ 239,896
$ 500,000 $ 303,896 $ 303,896 $ 303,896 $ 303,896
$ 600,000 $ 367,896 $ 367,896 $ 367,896 $ 367,896
$ 700,000 $ 431,896 $ 431,896 $ 431,896 $ 431,896
$ 800,000 $ 495,896 $ 495,896 $ 495,896 $ 495,896
$ 900,000 $ 559,896 $ 559,896 $ 559,896 $ 559,896
$1,000,000 $ 623,896 $ 623,896 $ 623,896 $ 623,896
$1,100,000 $ 687,896 $ 687,896 $ 687,896 $ 687,896
$1,200,000 $ 751,896 $ 751,896 $ 751,896 $ 751,896
$1,300,000 $ 815,896 $ 815,896 $ 815,896 $ 815,896
$1,400,000 $ 879,896 $ 879,896 $ 879,896 $ 879,896
$1,500,000 $ 943,896 $ 943,896 $ 943,896 $ 943,896
$1,600,000 $ 1,007,896 $ 1,007,896 $ 1,007,896 $1,007,896
$1,700,000 $ 1,071,896 $ 1,071,896 $ 1,071,896 $1,071,896
Years of Service
Remuneration 15 20 25 30 or more
$ 100,000 $ 46,804 $ 46,804 $ 46,804 $ 55,188
$ 200,000 $ 110,804 $ 110,804 $ 110,804 $ 110,804
$ 300,000 $ 174,804 $ 174,804 $ 174,804 $ 174,804
$ 400,000 $ 238,804 $ 238,804 $ 238,804 $ 238,804
$ 500,000 $ 302,804 $ 302,804 $ 302,804 $ 302,804
$ 600,000 $ 366,804 $ 366,804 $ 366,804 $ 366,804
$ 700,000 $ 430,804 $ 430,804 $ 430,804 $ 430,804
$ 800,000 $ 494,804 $ 494,804 $ 494,804 $ 494,804
$ 900,000 $ 558,804 $ 558,804 $ 558,804 $ 558,804
$ 1,000,000 $ 622,804 $ 622,804 $ 622,804 $ 622,804
$ 1,100,000 $ 686,804 $ 686,804 $ 686,804 $ 686,804
$ 1,200,000 $ 750,804 $ 750,804 $ 750,804 $ 750,804
$ 1,300,000 $ 814,804 $ 814,804 $ 814,804 $ 814,804
$ 1,400,000 $ 878,804 $ 878,804 $ 878,804 $ 878,804
$ 1,500,000 $ 942,804 $ 942,804 $ 942,804 $ 942,804
$ 1,600,000 $ 1,006,804 $ 1,006,804 $ 1,006,804 $ 1,006,804
$ 1,700,000 $ 1,070,804 $ 1,076,804 $ 1,076,804 $ 1,076,804 A participant's remuneration covered by the Retirement Income Plan (the "Retirement Income Plan") is his or her average base salary and short-term incentive payment (as reported in the Summary Compensation Table) for the five calendar plan years during the last ten years of the participant's career for which such average is the highest. The estimated years of service for each named executive employed by the CompanyLG&E Energy at December 31, 19982000 is as follows: 3234 years for Mr. Hale; 297 years for Mr. Lucas; 4Staffieri; 6 years for Mr. McCall; 93 years for Mr. Wood;Newton; and 63 years for Mr. Staffieri.Duncan. Benefits shown are computed as a straight life single annuity beginning at age 65.
Current Federal law prohibits paying benefits under the Retirement Income Plan in excess of $120,000 per year. Officers of LG&E KUEnergy, LG&E and LG&E EnergyKU with at least one year of service with eitherany company are eligible to participate in LG&E Energy's Supplemental Executive Retirement Plan (the "Supplemental Executive Retirement Plan"), which is an unfunded supplemental plan that is not subject to the $120,000 limit. Presently, participants in the Supplemental Executive Retirement Plan consist of all of the eligible officers of LG&E KUEnergy, LG&E and LG&E Energy.KU. This plan provides generally for retirement benefits equal to 64% of average current earnings during the final 36 months prior to retirement, reduced by Social Security benefits, by amounts received under the Retirement Income Plan and by benefits from other employers. As part of its employment agreement with Mr. Hale, LG&E established a separate Supplemental Executive Retirement Plan. The special plan generally providesprovided for a retirement benefit for Mr. Hale of 2% for each of his first 20 years of service with LG&E Energy, LG&E or with certain prior employers, 1.5% for each of the next 10 years of service and 1% for each remaining year of service completed prior to age 65, all multiplied by Mr. Hale's final 36 monthsmonths' average compensation, less benefits payable from the Retirement Income Plan, benefits payable from any other qualified or nonqualified plan sponsored by LG&E Energy, LG&E or certain prior employers, and primary Social Security benefits. Under Mr. Hale's
18
prior employment agreement (see below), he may elect to commence payment of his retirement benefits at age 50. If he retires prior to age 65,Upon Mr. Hale's retirement on April 30, 2001 the special plan terminated and he became entitled to the actual benefits will be
reduced by factors set forth in the employment agreement.

20
below.
The estimated annual benefits to be received under the Retirement Income Plan and the Supplemental Executive Retirement PlansPlan upon normal retirement at
age 65 and after deduction of Social Security benefits will be $712,328$746,930 for Mr. Hale; $122,371$546,669 for Mr. Lucas; $249,108Staffieri; $331,937 for Mr. McCall; $292,023$273,725 for Mr. Staffieri;Newton; and $241,739$5,166 for Mr. Wood.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT

ARRANGEMENTS AND CHANGE IN CONTROL PROVISIONS

On May 20, 1997,Duncan. Estimated figures are given and normal retirement ages of 65 are assumed for the officers, except actual benefits are calculated and current age and age 62 are used for Messrs. Hale and Duncan, respectively, due to the terms of Mr. HaleHale's retirement and Mr. Duncan's departure following change in control, respectively.
Employment Contracts and Termination of Employment
Arrangements and Change in Control Provisions
During 2000, in connection with the LG&E Energy-Powergen merger, Messrs. Staffieri, McCall and Newton entered into a newrevised employment agreement with LG&E
Energy for servicesand severance agreements, which were subsequently amended prior to be provided to LG&E Energy and its subsidiaries,
including LG&E and KU. This agreement became effective upon the May 4, 1998
consummationeffectiveness of the merger, with KU Energy and has an initial term of five years
ending on May 4, 2003. Under the agreement, Mr. Hale is entitled to an annual
base salary of not less than $675,000, subject to annual review by the
Compensation Committee, and to participate in the Short-Term Plan and the
Long-Term Plan. Mr. Hale's agreement with LG&E Energy provides for a short-term
incentive target award of not less than 60% of base salary and long-term
incentive grants with a present value of not less than 110% of base salary to be
delivered two-thirds in the form of performance units/shares and one-third in
the form of non-qualified stock options. In addition, the agreement provides
that at the Company's expense a life insurance policy in the amount of not less
than $2 million shall be provided to Mr. Hale. LG&E Energy's Board of Directors
may terminate the agreement at any time and, if it does so for reasons other
than cause, LG&E Energy must pay Mr. Hale's base salary plus his target
short-term incentive award for the remaining term of his employment contract,
but not less than two years.

During 1998, officers of LG&E Energy and LG&E entered into revisedyear terms, each containing change in control agreements,provisions, which agreements generally provide for the benefits described below. In the event of a change in control, all suchThese officers of LG&E
and LG&E Energythe Companies shall be entitled to the following payments if within
twenty-four months after such change in control, they are terminated for reasons other than cause or disability or death, or their employment responsibilities are altered: (i) all accrued compensation; (ii)(A) acceleration of scheduled retention payments in the aggregate amounts of $2,392,330, $1,265,944 and $670,052, respectively; (B) a severancecash payment of $262,835, $172,028 and $143,974, respectively, and the vesting of the restricted Powergen ADR's and dividends described in the Summary Compensation Table contained in this proxy statement; and (C) an amount equal to 2.99
timesnot less than the sum of (a)(1) his or her annual base salary and (b)(2) his or her bonus or "target" award paid or payable, pursuantprorated for the number of months remaining in the term of the employment period (which payment shall be increased to 2.99 times the Short-Term Plan.sum of (1) and (2) in the event of a termination following a change in control of Powergen). In addition, such officers will receive, upon the earlier to occur of (a) a change in control of Powergen or (b) the 18 month anniversary of their employment agreement, the amounts described in clauses (A) and (B) above. It is anticipated that the E.ON acquisition of Powergen will constitute a change in control under the terms of such agreements.
Payments may be made to executives which would equal or exceed an amount which would constitute a nondeductible payment pursuant to Section 280G of the Internal Revenue Code, of
1986, as amended (the "Code"), or be subject to an excise tax imposed by Section
4999 of the Code and, in the latter case, LG&E and LG&E Energy will "gross up"
the applicable severance payments to the executive to cover any excise taxes
that may be due. The executive is entitled to receive such amounts in a lump-sum
payment within thirty days of termination. A change in control encompasses
certain mergers and acquisitions, changes in Board membership and acquisitions
of voting securities of LG&E Energy.

Also upon a change in control of LG&E Energy, all stock-based awards shall
vest 100%, and all performance-based awards, such as performance units and
performance shares, shall immediately be paid out in cash, based upon the extent
to which the performance goals have been met through the effective date of the
change in control or based upon the assumed achievement of such goals, whichever
amount is higher and prorated for the executive's deemed period of service
during the relevant performance period.if any. Additionally, executives shall receive continuation of certain welfare benefits and payments in respect of accrued but unused vacation days and for out-placement assistance. During 1998, Michael R.
Whitley, former Vice ChairmanA change in control encompasses certain merger and Chief Operating Officer received cash payments
before tax "gross up"acquisition events, changes in board membership and acquisitions of approximately $3.9 million, pursuant to existing
employment andvoting securities of Powergen.
At the effective time of the LG&E Energy-Powergen merger, in consideration for the cancellation of their prior change in control agreements, Messrs. Staffieri, McCall and Newton received payments of approximately $600,000, $650,000 and $800,000, respectively, (net of payments to reimburse for the payment of excise taxes). Mr. Duncan, who resigned in additionJanuary 2001, received a payment of $2,017,683 pursuant to the stock-based
awardsterms of his existing change in control and other benefits described above, innon-disclosure and confidentiality agreements.
During 2000, Mr. Hale served as Chief Executive Officer of the Company. In connection with the LG&E Energy-Powergen merger, Mr. Hale entered into a new employment agreement dated as of February 25, 2000 (the "2000 Agreement"), which was effective on December 11, 2000 and had an initial term of three years ending on December 11, 2003. Under the 2000 Agreement, Mr. Hale was entitled to an annual base salary of not less than $816,200 and to participate in the Short-Term Plan and the Long-Term Plan. Benefits paid under these plans are shown in the "Summary Compensation Table". In addition, the agreement provided that a life insurance policy in the amount of not less than $2 million was provided to Mr. Hale at LG&E Energy's expense. At the effective time of the LG&E Energy-Powergen merger, in consideration for the cancellation of his departureprior employment agreement and associated change in control
19
provisions, Mr. Hale received a payment of approximately $5,006,923 (net of payments to reimburse him for the payment of excise taxes). Such amount was equal to the cash severance amounts to which Mr. Hale would have been entitled under such provisions had he terminated his employment following closing of the merger. In addition, upon the effectiveness of the merger, restrictions on each share of restricted stock granted to Mr. Hale under the Long-Term Plan were removed and each such share, as with other outstanding shares of LG&E Energy common stock, was converted into the right to receive the merger consideration of $24.85 per share, without interest. See"Summary Compensation Table". Mr. Hale retired from LG&E.

21
service to the Company on April 30, 2001 and qualified for a supplemental retirement benefit in an annual amount equal to 50% of the sum of his base salary and annual target bonus as in effect on the date of his retirement.
Report of the Audit Committee
The Audit Committee of the Board of Directors is composed entirely of nonemployee directors, all of whom are independent. The Board of Directors has adopted a charter for the Audit Committee, which is included as Appendix A to this Proxy Statement. The Audit Committee's responsibilities are described in the Charter. The Audit Committee held two meeting during 2000.
The financial statements of Louisville Gas and Electric Company are prepared by management, which is responsible for their objectivity and integrity. With respect to the financial statements for the calendar year ended December 31, 2000, the audit Committee reviewed and discussed the audited financial statements and the quality of the financial reporting with management and the independent auditors. It also discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees) and received and discussed with the independent auditors the matters in the written disclosures required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees).
Based upon the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors the inclusion of the audited financial statements in Louisville Gas and Electric Company's annual Report on Form 10-K for the year ended December 31, 2000, for filing with the Securities and Exchange Commission.
The following information on independent audit fees and services is being provided in compliance with the Securities and Exchange Commission rules on auditor independence.
1.
Arthur Andersen LLP fees for the period ended December 31, 2000 are as follows:

—Audit Fees

$37,500

—Financial Information Systems Design and Implementation —
—All Other Fees $130,685
2.
The Audit Committee considered whether the independent accountant's provision of non-audit services is compatible with maintaining the accountant's independence.

3.
The Audit Committee has been advised by Arthur Andersen LLP that hours expended on the audit engagement were entirely performed by Arthur Andersen personnel.
This report has been provided by the Audit Committee.
Sydney Gillibrand, Chairman
Sir Frederick Crawford
20
SHAREHOLDER PROPOSALS
FOR 20002002 ANNUAL MEETING
Any shareholder may submit a proposal for consideration at the 20002002 Annual Meeting. Any shareholder desiring to submit a proposal for inclusion in the proxy statement for consideration at the 2000 Annual Meeting2002 annual meeting should forward the proposal so that it will be received at LG&E's principal executive offices no later than November 28, 1999.January 20, 2002. Proposals received by that date that are proper for consideration at the Annual Meetingannual meeting and otherwise conforming to the rules of the Securities and Exchange Commission will be included in the 20002002 proxy statement.
Under the Company'sLG&E's bylaws, shareholders intending to submit a proposal in person at the Annual Meetingannual meeting must provide advance written notice along with other prescribed information. In general, such notice must be received by the Secretary of the CompanyLG&E (a) not less than 90 days prior to the meeting date or (b) if the meeting date is not publicly announced more than 100 days prior to the meeting, by the tenth day following such announcement. Proposals not properly submitted will be considered untimely.
OTHER MATTERS
At the Annual Meeting,annual meeting, it is intended that the first two items set forth in the accompanying notice and described in this proxy statement will be presented. Should any other matter be properly presented at the Annual Meeting, the persons named in the accompanying proxy will vote upon them in accordance with their best judgment. Any such matter must comply with those provisions of LG&E's Articles of Incorporation requiring advance notice for new business to be acted upon at the meeting. The Board of Directors knows of no other matters that may be presented at the meeting.
LG&E will bear the costs of printing and preparing this proxy solicitation. LG&E will provide copies of this proxy statement, the accompanying proxy and the Annual Report and AppendixFinancial Report to brokers, dealers, banks and voting trustees, and their nominees, for mailing to beneficial owners, and upon request therefor, will reimburse such record holders for their reasonable expenses in forwarding solicitation materials. In addition to using the mails, proxies may be solicited by directors, officers and regular employees of LG&E, in person or by telephone.
Any shareholder may obtain without charge a copy of LG&E Energy&E's Annual Report on Form 10-K, as filed with the Securities and LG&E have retained D.F. KingExchange Commission for the year 2000 by submitting a request in writing to: John R. McCall, Secretary, Louisville Gas and Electric Company, P.O. Box 32010, 220 West Main Street, Louisville, Kentucky 40232.
21

APPENDIX A
LOUISVILLE GAS & Co., Inc.,ELECTRIC COMPANY
AUDIT COMMITTEE CHARTER
Mission Statement
The Audit Committee (the "Committee") is a firmCommittee of professional
proxy solicitors,the Board of Directors of Louisville Gas and Electric Company (the "Company"). Its primary function is to assist the Board in fulfilling its oversight responsibilities by reviewing the financial information provided to shareholders and others, the systems of internal controls which management and the Board of Directors have established and the audit process.
Composition
The Committee will be composed of at least three independent members of the Board of Directors who shall serve at the pleasure of the Board. Membership of the Committee shall be in accordance with the following requirements:
1.
Each member shall be Independent of management as defined by applicable laws or exchange regulations.

2.
In the business judgement of the Board of Directors, each member shall be free from any relationship that would interfere with the exercise of independent judgment.

3.
Each member shall be financially literate, as such qualification is interpreted by the Company's Board of directors in its business judgment, or must become financially literate within a reasonable period of time after his or her appointment to the Audit Committee; and

4.
At least one member of the Audit Committee must have accounting or related financial management expertise, as the Board of Directors interprets such qualification in its business judgment.
The membership of the Committee will be reviewed annually and upon any membership changes for compliance with the above requirements.
Audit Committee members will be appointed by the Board of Directors at the recommendation of the Nominating Committee. One of the members will be designated as the Committee's Chairman. The Chairman will preside over the Committee meetings and report Committee actions to the Board of Directors.
Meetings
The Committee will meet on a regular basis and will call special meetings as circumstances require. It will meet privately with the Director of Internal Auditing and the independent public accountant in separate executive sessions to discuss any matters that the Committee, the Director of Internal Auditing, or the independent accountant believe should be discussed privately. The Committee may ask members of management or others to attend meetings and provide pertinent information, as necessary.
Responsibilities
1.
Provide an open avenue of communication between the internal auditors, the independent accountant, and the Board of Directors.

2.
Review and update, where appropriate, the Committee's charter annually.

3.
Recommend to the Board of Directors on an annual basis the independent accountant to be nominated, approve the compensation of the independent accountant, and review and approve the
A–1
discharge of the independent accountant. The independent accountant is ultimately responsible to the Board of Directors and the Audit Committee.
4.
Review and concur in the solicitationsappointment, replacement, reassignment or dismissal of the Director of Internal Auditing.

5.
Require the independent accountant to submit to the Committee on a periodic basis a formal written statement regarding independence of such independent accountant and all facts and circumstances relevant thereto; discuss with the independent accountant its independence; confirm and assure the independence of the Internal Auditing Department and the independent accountant, including a review of management consulting services and related fees provided by the independent accountant; and recommend to the Board of Directors actions necessary to ensure independence of the Internal Auditing Department and the independent accountant.

6.
Inquire of management, the Director of Internal Auditing, and the independent accountant about significant risks or exposures and assess the steps management has taken to minimize such risk to the Company.

7.
Approve the annual audit plan and review the five-year plan of the internal auditing function. Review the independent accountant's proposed audit plan, including coordination with Internal Auditing's annual audit plan.

8.
Review with the Director of Internal Auditing and the independent accountant the coordination of audit effort to assure completeness of coverage, reduction of redundant efforts, and the effective use of audit resources.

9.
Consider with management and the independent accountant the rationale for employing audit firms other than the principal independent accountant.

10.
Consider and review with the independent accountant and the Director of Internal Auditing:

a.
The adequacy of the Company's internal controls, including computerized information system controls and security, and

b.
Any related significant issues identified by the independent accountant and internal auditing, together with management's responses thereto.

11.
Review with management and the independent accountant at an estimated feethe completion of $9,000
plus reimbursementthe annual audit:

a.
The Company's annual financial statements and related footnotes;

b.
The independent accountant's audit of reasonable expenses.

ANY SHAREHOLDER MAY OBTAIN WITHOUT CHARGE A COPY OF LG&E'S ANNUAL REPORT ON
FORM 10-K, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR
1998, BY SUBMITTING A REQUEST IN WRITING TO: JOHN R. MCCALL, SECRETARY,
the financial statements and the report thereon;

c.
The independent accountant's judgement about the quality and appropriateness of the Company's accounting principals as applied to its financial reporting;

d.
Any significant changes required in the independent accountant's audit plan and scope;

e.
Any serious difficulties or disputes with management encountered during the course of the audit; and

f.
Other matters related to the conduct of the audit which are to be communicated to the Committee under generally accepted auditing standards.

12.
Review with management such appropriate notices or reports as may be required to be filed on behalf of the Committee with the regulatory authorities, exchanges or included in the Company's proxy materials or otherwise, pursuant to law or exchange regulations.
A–2
13.
Consider and review with management and the Director of Internal Auditing:

a.
Any difficulties encountered in the course of their audits, including any restrictions on the scope of their work or access to required information;

b.
Any significant changes required in their audit plan;

c.
Any significant audit findings and management's responses thereto;

d.
The Internal Auditing Department staffing and staff qualifications; and

e.
The Internal Auditing Department charter.

14.
Review with the Director of Internal Auditing the results of the annual Code of Business Conduct questionnaire.

15.
Review legal and regulatory matters that may have a material impact on the financial statements, related Company compliance policies and programs, and reports received from regulators.

16.
Report Committee actions to the Board of Directors with such recommendations as the Committee may deem appropriate.

17.
Conduct or authorize investigations into any matters within the Committee's scope of responsibilities, and retain independent counsel, accountants or others to assist it in the conduct of any investigation.

18.
Assume such other duties and considerations as may be delegated to the Committee by the Board of Directors, or required of the Committee upon the request of the Board of Directors from time to time pursuant to a duly adopted resolution of the Board of Directors.
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LOUISVILLE GAS AND ELECTRIC COMPANY P.O. BOX 32010, 220 WEST MAIN STREET,
LOUISVILLE, KENTUCKY 40232.

[LOGO]
PRINTED ON RECYCLED PAPER
2000 FINANCIAL REPORT

LOUISVILLE GAS AND ELECTRIC COMPANY

APPENDIX TO PROXY STATEMENT

March 26, 1999

2000 FINANCIAL REPORT

TABLE OF CONTENTS
Index of Abbreviations 2

Selected Financial Data

Management's Discussion and Analysis

Statements of Income

Statements of Retained Earnings

Statements of Comprehensive Income

Balance Sheets

Statements of Cash Flows

Statements of Capitalization

Notes to Financial Statements

Report of Management

Report of Independent Public Accountants

41
1

INDEX OF ABBREVIATIONS
Capital Corp. LG&E Capital Corp.
Clean Air Act The Clean Air Act, as amended in 1990
CNN Certificate of Public Convenience and Necessity
CT Combustion Turbines
DSM Demand Side Management
ECR Environmental Cost Recovery
EEI Electric Energy, Inc.
EITF Emerging Issues Task Force Issue
EPA U.S. Environmental Protection Agency
ESM Earnings Sharing Mechanism
FAC Fuel Adjustment Clause
FERC Federal Energy Regulatory Commission
FPA Federal Power Act
FT Firm Transportation
GSC Gas Supply Clause
Holding Company Act Public Utility Holding Company Act of 1935
IBEW International Brotherhood of Electrical Workers
IMEA Illinois Municipal Electric Agency
IMPA Indiana Municipal Power Agency
Kentucky Commission Kentucky Public Service Commission
KIUC Kentucky Industrial Utility Consumers, Inc.
KU Kentucky Utilities Company
KU Energy KU Energy Corporation
Kva Kilovolt-ampere
LEM LG&E Energy Marketing Inc.
LG&E Louisville Gas and Electric Company
LG&E Energy LG&E Energy Corp.
LG&E Services LG&E Energy Services Inc.
Mcf Thousand Cubic Feet
Merger Agreement Agreement and Plan of Merger dated May 20, 1997
MGP Manufactured Gas Plant
Mmbtu Million British thermal units
Moody's Moody's Investor Services, Inc.
Mw Megawatts
Mwh Megawatt hours
NAAQS National Ambient Air Quality Standards
NNS No-Notice Service
NOx Nitrogen Oxide
PBR Performance-Based Ratemaking
Powergen Powergen plc
PUHCA Public Utility Holding Company Act of 1935
S&P Standard & Poor's Rating Services
SCR Selective Catalytic Reduction
SEC Securities And Exchange Commission
SERP Supplemental Employee Retirement Plan
SFAS Statement of Financial Accounting Standards
SIP State Implementation Plan
SO₂ Sulfur Dioxide
Tennessee Gas Tennessee Gas Pipeline Company
Texas Gas Texas Gas Transmission Corporation
TRA Tennessee Regulatory Authority
Trimble County LG&E's Trimble County Unit 1
USWA United Steelworkers of America
Utility Operations Operations of LG&E and KU
2
Louisville Gas and Electric Company
Selected Financial Data.
Years Ended December 31
(Thousands of Income 1

Statements of Retained Earnings 1

Statements of Cash Flows 2

Balance Sheets 3

Statements of Capitalization 4

Statements of Comprehensive Income 5

Notes to Financial Statements 6

Report of Management 24

Report of Independent Public Accountants 25

Management's Discussion and Analysis of Results of
Operations and Financial Condition 26

SELECTED FINANCIAL DATA
(Thousands of $)
YEARS ENDED DECEMBER 31
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----

Operating Revenues:
Revenues ....................... $ 854,556 $ 845,543 $ 821,115 $ 751,763 $ 759,075
Provision for Rate Refunds ..... (4,500) -- -- (28,300) --
----------------------------------------------------------------------
Total Operating Revenues ..... 850,056 845,543 821,115 723,463 759,075
----------------------------------------------------------------------
Net Operating Income:
Before Unusual Items ........... 138,207 148,186 147,263 138,203 134,393
Provision for Rate Refunds ..... (2,684) -- -- (16,877) --
Non-Recurring Charges .......... -- -- -- -- (23,353)
----------------------------------------------------------------------
Total Net Operating Income ... 135,523 148,186 147,263 121,326 111,040
----------------------------------------------------------------------
Net Income:
Before Unusual Items ........... 104,381 113,273 107,941 100,061 94,423
Provision for Rate Refunds ..... (2,684) -- -- (16,877) --
Non-Recurring Charges and Merger
Costs to Achieve ............. (23,577) -- -- -- (32,734)
Cumulative Effect of
Accounting Change ............ -- -- -- -- (3,369)
----------------------------------------------------------------------
Total Net Income ............. 78,120 113,273 107,941 83,184 58,320
----------------------------------------------------------------------
Net Income Available for
Common Stock ................... $ 73,552 $ 108,688 $ 103,373 $ 76,873 $ 52,492
----------------------------------------------------------------------

Total Assets ....................... $ 2,104,637 $ 2,055,641 $ 2,006,712 $ 1,979,490 $ 1,966,590
Long-Term Obligations (including
amounts due within one year) ... 626,800 646,800 646,800 662,800 662,800
2000 1999 1998 1997 1996
LG&E:
Operating revenues:
Revenues $ 985,947 $ 969,984 $ 854,556 $ 845,543 $ 821,115
Provision for rate refunds (2,500 ) (1,735 ) (4,500 ) — —
Total operating revenues 983,447 968,249 850,056 845,543 821,115
Net operating income:
Before unusual items 150,361 142,263 138,207 148,186 147,263
Provision for rate refunds (1,491 ) (2,172 ) (2,684 ) — —
Total net operating income 148,870 140,091 135,523 148,186 147,263
Net income:
Before unusual items 112,064 108,442 104,381 113,273 107,941
Provision for rate refunds (1,491 ) (2,172 ) (2,684 ) — —
Merger costs — — (23,577 ) — —
Net income 110,573 106,270 78,120 113,273 107,941
Net income available for common stock 105,363 101,769 73,552 108,688 103,373
Total assets 2,226,084 2,171,452 2,104,637 2,055,641 2,006,712
Long-term obligations (including amounts due within one year) $ 606,800 $ 626,800 $ 626,800 $ 646,800 $ 646,800
LG&E's Management's Discussion and Analysis of Results of Operations and Financial Condition and theLG&E's Notes to Financial Statements should be read in conjunction with the above information.

LOUISVILLE GAS
3

Louisville Gas and Electric Company
Management's Discussion and Analysis of Results of Operations and Financial Condition.
GENERAL
The following discussion and analysis by management focuses on those factors that had a material effect on LG&E's financial results of operations and financial condition during 2000, 1999, and 1998 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 reports to the Securities and Exchange Commission, including Exhibit No. 99.01 to this report on Form 10-K.
MERGER
On December 11, 2000, LG&E Energy Corp. and Powergen plc successfully completed the merger transaction involving the two companies. 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 $2.2 billion of LG&E Energy's debt. Pursuant to the acquisition agreement, LG&E Energy became a wholly owned subsidiary of Powergen and, as a result, LG&E became an indirect subsidiary of Powergen. LG&E will continue its separate identity and serve customers in Kentucky under its existing name. The preferred stock and debt securities of LG&E were not affected by this transaction and LG&E will continue to file SEC reports. Following the merger, Powergen became a registered holding company under PUHCA, and LG&E, as a subsidiary of a registered holding company, became subject to additional regulation under PUHCA. See "Rates and Regulation" under Item 1.
Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy and KU Energy merged, with LG&E Energy as the surviving corporation. The outstanding preferred stock of LG&E, a subsidiary of LG&E Energy, was not affected by the merger. See Note 2 of LG&E's Notes to Financial Statements under Item 8.
RESULTS OF OPERATIONS
Net Income
LG&E's net income increased $4.3 million for 2000, as compared to 1999. This increase is mainly due to higher gas sales resulting from the colder winter weather experienced in 2000, lower administrative costs and operating expenses at the electric generating stations, partially offset by decreased electric revenues due to a rate reduction ordered by the Kentucky Commission and higher maintenance expenses.
Net income increased $28.2 million for 1999, compared to 1998, primarily due to non-recurring charges in 1998 for merger-related expenses of $23.6 million, after tax. Excluding these non-recurring charges, net income increased $4.6 million. This increase is mainly due to higher electric revenues, lower administrative costs and operating expenses at the electric generating stations, partially offset by higher maintenance expenses at the electric generating stations.
4
Revenues
A comparison of operating revenues for the years 2000 and 1999, excluding the provisions recorded for refunds in 2000 and in 1999, with the immediately preceding year reflects both increases and decreases, which have been segregated by the following principal causes (in thousands of $):
Increase (Decrease) From Prior Period
Electric Revenues Gas Revenues
Cause
2000 1999 2000 1999
Retail sales:
Fuel and gas supply adjustments, etc. $ (9,027 ) $ (2,014 ) $ 57,156 $ (24,791 )
Merger surcredit (2,331 ) (4,194 ) — —
Performance based rate 4,114 (6,076 ) — —
Demand side management/decoupling 6 (2,985 ) (20 ) (6,462 )
Environmental cost recovery surcharge (1,308 ) (570 ) — —
Electric rate reduction (20,727 ) — — —
Gas rate increase — — 4,221 —
Variation in sales volumes 5,753 22,009 23,596 17,779
Total retail sales (23,520 ) 6,170 84,953 (13,474 )
Wholesale sales (56,256 ) 121,996 9,226 (602 )
Gas transportation-net — — 572 (575 )
Other 829 1,228 159 685
Total $ (78,947 ) $ 129,394 $ 94,910 $ (13,966 )
Electric revenues decreased in 2000 primarily due to a decrease in brokered activity in the wholesale electric sales market and the electric rate reduction ordered by the Kentucky Commission. In January 2000, the Kentucky Commission ordered an electric rate reduction and the termination of LG&E's proposed electric PBR mechanism. Gas revenues increased primarily as a result of higher gas supply costs billed to customers through the gas supply clause coupled with increased gas sales in 2000 due to colder weather, as heating degree days increased 15% over 1999. Increased wholesale gas sales, and the effects of a gas rate increase ordered by the Kentucky Commission in September 2000 also contributed to increased gas revenues.
Electric revenues increased in 1999 primarily due to wholesale electric sales and higher levels of retail sales volumes, partially offset by the PBR and merger surcredit bill reductions. Wholesale sales increased in 1999 due to large amounts of power available. Gas revenues decreased primarily as a result of lower gas supply costs billed to customers through the gas supply clause, partially offset by increased gas sales in 1999 due to colder weather.
Expenses
Fuel for electric generation and gas supply expenses comprises a large component of LG&E's total operating costs. LG&E's electric rates contain an FAC and gas rates contain a GSC, whereby increases or decreases in the cost of fuel and gas supply are reflected in the FAC and GSC factors, subject to approval by the Kentucky Commission. In July 1999, the Kentucky Commission implemented rates proposed in LG&E's PBR filing resulting in the discontinuance of the FAC. In January 2000, the Kentucky Commission rescinded the PBR rates and ordered the reinstatement of the FAC. See Note 3 of LG&E's Notes to Financial Statements under Item 8 for a further discussion of the PBR and the FAC.
Fuel for electric generation increased $.3 million (.2%) in 2000 because of an increase in generation to support increased electric sales ($7.6 million), offset partially by a lower cost of coal burned ($7.3 million). Fuel for electric generation increased $4.4 million (2.9%) in 1999 because of an
5
increase in generation to support increased electric sales ($7.4 million), offset partially by a lower cost of coal burned ($3 million). The average delivered cost per ton of coal purchased was $20.96 in 2000, $21.49 in 1999, and $22.38 in 1998.
Power purchased decreased $72.7 million (42.9%) in 2000 primarily due to decreased brokered sales activity in the wholesale electric market. Power purchased increased $119.4 million (238%) in 1999 primarily due to increased purchases to serve native load customers during the summer months and off-system sales activity.
Gas supply expenses increased $82.2 million (71.6%) in 2000 primarily due to an increase in cost of net gas supply ($70.4 million), and due to an increase in the volume of gas delivered to the distribution system ($11.8 million). Gas supply expenses decreased $11.1 million (8.9%) in 1999 primarily due to a decrease in cost of net gas supply ($17.1 million), partially offset by an increase in the volume of gas delivered to the distribution system ($6 million). The average unit cost per Mcf of purchased gas was $5.08 in 2000, $2.99 in 1999, and $3.05 in 1998.
Operation expenses decreased $18.7 million (12.1%) in 2000 primarily due to lower administrative costs, $13.8 million, (due to decreases in pension expense, $5.4 million, year 2000 expenses, $4.0 million, and decreased salaries due to fewer employees in 2000, $2 million) and a decrease in steam production costs primarily at the Mill Creek generating station ($5 million). Operation expenses decreased $8.9 million (5.4%) in 1999 primarily due to decreased costs to operate the electric generating plants ($5.7 million) and lower administrative costs ($4.6 million).
Maintenance expenses for 2000 increased $5.6 million (9.6%) primarily due to an increase in software maintenance agreements ($3.9 million), and maintenance of communications equipment ($1.5 million). Maintenance expenses for 1999 increased $5.3 million (10.1%) primarily due to increases in scheduled outages at the Mill Creek generating station units 3 and 4, and the Cane Run generating station units 4 and 6 ($2.4 million) and increased forced outages at Mill Creek units 1 and 4 and Cane Run unit 5 ($3.9 million).
Depreciation and amortization increased $1.1 million (1.1%) in 2000 and increased $4 million (4.3%) in 1999 over 1998 because of additional utility plant in service in both years.
A depreciation study was completed in late 2000 with new depreciation rates going into effect on January 1, 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 increased $2.1 million (12.1%) in 2000 primarily due to increased payroll and property taxes.
Other income—net, increased $.8 million (18.9%) in 2000 primarily due to a decrease in income tax expense associated with increased interest expenses.
LG&E incurred a pre-tax charge in 1998 for costs associated with the merger of LG&E Energy and KU Energy of $32.1 million. The amount charged is in excess of the amount permitted to be deferred as a regulatory asset by the Kentucky Commission. The corresponding tax benefit of $8.5 million is recorded in other income-net. See Note 2 of LG&E's Notes to Financial Statements under Item 8.
Interest charges for 2000 increased $5.3 million (13.9%) due to having short-term borrowings for entire 2000 as compared to two months in 1999 ($7.1 million), partially offset by a decrease in interest on debt to associated companies ($1 million) and lower interest rates on variable rate debt ($1 million). Interest charges for 1999 increased $1.6 million (4.5%) due to short-term borrowings, partially offset by lower interest rates on variable rate debt ($.6 million). See Note 10 of LG&E's Notes to Financial Statements under Item 8.
6
LG&E's embedded cost of long-term debt was 5.40% at December 31, 2000, and 5.46% at December 31, 1999. See Note 10 of LG&E's Notes to Financial Statements under Item 8.
Variations in income tax expenses are largely attributable to changes in pre-tax income as well as non-deductible merger expenses in 1998.
The rate of inflation may have a significant impact on LG&E's operations, its ability to control costs and the need to seek timely and adequate rate adjustments. However, relatively low rates of inflation in the past few years have moderated the impact on current operating results.
LIQUIDITY AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(ThousandsCAPITAL RESOURCES
LG&E uses net cash generated from its operations and external financing to fund construction of $)

plant and equipment and the payment of dividends. LG&E believes that such sources of funds will be sufficient to meet the needs of its business in the foreseeable future.
Operating Activities
Cash provided by operations was $156.2 million, $180.5 million and $225.7 million in 2000, 1999, and 1998, respectively. The 2000 decrease resulted mainly from an increase in accounts receivable, and a decrease in accrued taxes. The 1999 decrease resulted from a net decrease in non-cash income statement items and a net decrease in net current assets, including decreases in accounts payable and accrued taxes.
Investing Activities
LG&E's primary use of funds continues to be for capital expenditures and the payment of dividends. Capital expenditures were $144 million, $195 million and $138 million in 2000, 1999, and 1998, respectively. LG&E expects its capital expenditures for 2001 and 2002 will total approximately $413 million, which consists primarily of construction estimates associated with installation of nitrogen oxide control equipment as described in the section titled "Environmental Matters," purchase of two jointly owned CTs with KU and on-going construction for the distribution systems.
Net cash used for investment activities decreased by $43.3 million in 2000 as compared to 1999, and increased $47.2 million in 1999 compared to 1998, primarily due to construction expenditures.
Financing Activities
Cash outflows for financing activities in 2000 were $67.7 million. Cash inflow from financing activities in 1999 was $26.7 million and cash outflow for 1998 was $107.6 million. In 2000, total debt was paid down by $20 million to $606.8 million at December 31, 2000. LG&E received $40 million in contributed capital from its parent company in December 2000. LG&E also refinanced $108.3 million of its pollution control bonds in 2000.
As of December 2000, LG&E had committed credit facility aggregating $200 million with various banks. Unused capacity under these lines were approximately $200 million after considering the commercial paper support. The credit facility will expire in 2001 and management expects to renegotiate the credit facility at that time.
Future Capital Requirements
Future capital requirements may be affected in varying degrees by factors such as load growth, changes in construction expenditure levels, rate actions by regulatory agencies, new legislation, market entry of competing electric power generators, changes in environmental regulations and other
7
regulatory requirements. LG&E anticipates funding its requirements through operating cash flow, debt, preferred stock or common equity.
LG&E's debt ratings as of February 28, 2001, were:

YEARS ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
-------- --------- ---------

Operating Revenues
Electric ................................... $ 663,011 $ 614,532 $ 606,696
Gas ........................................ 191,545 231,011 214,419
-----------------------------------
Total operating revenues ................ 854,556 845,543 821,115
Provision for rate refund (Note 3) ......... (4,500) -- --
-----------------------------------
Net operating revenues (Note 1) ......... 850,056 845,543 821,115
-----------------------------------
Operating Expenses
Fuel for electric generation ............... 154,683 149,463 149,697
Power purchased ............................ 50,176 17,229 16,626
Gas supply expenses ........................ 125,894 158,929 140,482
Other operation expenses ................... 163,584 150,750 143,338
Maintenance ................................ 52,786 47,586 54,790
Depreciation and amortization .............. 93,178 93,020 89,002
Federal and State income taxes (Note 8) 56,307 64,081 63,259
Property and other taxes ................... 17,925 16,299 16,658
-----------------------------------
Total operating expenses ................ 714,533 697,357 673,852
-----------------------------------

Net Operating Income .......................... 135,523 148,186 147,263

Merger Costs to Achieve (Note 2) .............. 32,072 -- --
Other Income and (Deductions) (Note 9) ........ 10,991 4,277 920
Interest Charges .............................. 36,322 39,190 40,242
-----------------------------------
Net Income .................................... 78,120 113,273 107,941

Moody's S&P Fitch
First mortgage bonds A1 A- AA-
Unsecured debt A2 BBB A+
Preferred Stock Dividends ..................... 4,568 4,585 4,568
-----------------------------------

Net Income Available for Common Stock ......... $ 73,552 $ 108,688 $ 103,373
-----------------------------------
-----------------------------------
stock a2 BBB- A
Commercial paper P-1 A-2 F-1

STATEMENTS OF RETAINED EARNINGS
(Thousands
The Moody's and Fitch ratings are on Credit Watch with negative implications. 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.
Market Risks
LG&E is exposed to market risks from changes in interest rates and commodity prices. To mitigate changes in cash flows attributable to these exposures, LG&E uses various financial instruments including derivatives. Derivative positions are monitored using techniques that include market value and sensitivity analysis.
Interest Rate Sensitivity
LG&E has short-term and long-term variable rate debt obligations outstanding. At December 31, 2000, the potential change in interest expense associated with a 1% change in base interest rates of LG&E's unhedged debt was estimated at $1.2 million.
Interest rate swaps are used to hedge LG&E's underlying variable rate debt obligations. These swaps hedge specific debt issuance and consistent with management's designation are accorded hedge accounting treatment.
As of December 31, 2000, LG&E had swaps with a combined notional value of $234.3 million. The swaps exchange floating-rate interest payments for fixed interest payments to reduce the impact of interest rate changes on LG&E's Pollution Control Bonds. As of December 31, 2000, 66% of the outstanding variable interest rate borrowings were converted to fixed interest rates through swaps. The potential loss in fair value from these positions resulting from a hypothetical 1% adverse movement in base interest rates is estimated at $6.9 million as of December 31, 2000. Changes in the market value of these swaps if held to maturity, as LG&E intends to do, are not expected to have any effect on LG&E's net income or cash flow. See Note 4 of LG&E's Notes to Financial Statements under Item 8.
Commodity Price Sensitivity
LG&E has limited exposure to market price volatility in prices of fuel and electricity, as long as cost-based regulations exist, including the FAC and GSC.
8
YEAR 2000 COMPUTER SOFTWARE ISSUE
Result of Year 2000 Preparation
The remediation efforts of LG&E in preparing for potential Year 2000 computer problems were successful and resulted in LG&E incurring no material disruptions in services or operations of any sort. To the extent, if any, certain third parties such as interconnected utilities, key customers or suppliers still face Year 2000 disruptions due to incomplete remediation, LG&E may still retain risk related to Year 2000 issues. LG&E is not presently aware of any such situations and does not anticipate such events will have a material effect on LG&E's financial condition or results of operations.
Cost of Year 2000 Issues
LG&E's system modification costs related to the Year 2000 issue were expensed as incurred, while new system installations are being capitalized pursuant to generally accepted accounting principles. Through December 2000, LG&E incurred approximately $18.6 million in capital and operating costs in connection with the Year 2000 issue.
RATES AND REGULATION
Following the merger transaction involving LG&E Energy and Powergen, Powergen became a registered holding company under PUHCA. As a result, Powergen, its utility subsidiaries, including LG&E, and certain of its non-utility subsidiaries are subject to extensive regulation by the SEC under PUHCA with respect to issuances and sales of securities, acquisitions and sales of certain utility properties, and intra-system sales of certain goods and services. In addition, PUHCA generally limits the ability of registered holding companies to acquire additional public utility systems and to acquire and retain businesses unrelated to the utility operations of the holding company. Powergen believes that it has adequate authority (including financing authority) under existing SEC orders and regulations for it and its subsidiaries to conduct their businesses as proposed during 2001. Powergen will seek additional authorization when necessary.
LG&E is subject to the jurisdiction of the Kentucky Commission in virtually all matters related to electric and gas utility regulation, and as such, their accounting is subject to SFAS No. 71,Accounting for the Effects of Certain Types of Regulation. Given LG&E's competitive position in the market and the status of regulation in the state of Kentucky, LG&E has no plans or intentions to discontinue its application of SFAS No. 71. See Note 3 of LG&E's Notes to Financial Statements under Item 8.
Environmental Cost Recovery
In August 1999, a final order of the Kentucky Commission approved LG&E's settlement agreement concerning the refund of the recovery of costs associated with pre-1993 environmental projects. LG&E began applying the refund to customers' bills in October 1999, and completed the refund process in the month of November 2000. All aspects of the original litigation of this issue have now been resolved.
In March 2000, LG&E filed an application with the Kentucky Commission to obtain a CCN to construct up to three SCRs NOx reduction facilities. The construction and subsequent operation of the SCRs is intended to reduce NOx emission levels to meet the EPA's mandated NOx emission level of 0.15 lbs./ Mmbtu by May 2003. Following a period of discovery in the proceeding, the Kentucky Commission granted LG&E's request for a CCN in June 2000. In its order, the Kentucky Commission ruled that LG&E's proposed plan for construction was "reasonable, cost-effective and will not result in the wasteful duplication of facilities." In October 2000, LG&E filed an application with the Kentucky Commission to amend its Environmental Compliance Plan to reflect the addition of the proposed NOx reduction technology projects and to amend its Environmental Cost Recovery Tariff to include an
9
overall rate of return on capital investments. Approval of LG&E's application will allow LG&E to begin to recover the costs associated with these new projects, subject to Kentucky Commission oversight during normal six-month and two-year reviews. Following the completion of hearings in March 2001, a ruling is expected by May 2001.
Electric PBR/ESM
In October 1998, LG&E filed an application with the Kentucky Commission for approval of a new method of determining electric rates that sought to provide financial incentives for LG&E to further reduce customers' rates. The filing was made pursuant to the September 1997 Kentucky Commission order approving the merger of LG&E Energy and KU Energy, wherein the Kentucky Commission directed LG&E to indicate whether they desired to remain under traditional rate of return regulation or commence non-traditional regulation. The proposed ratemaking method, known as PBR, included financial incentives for LG&E to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the PBR proposal provided for financial penalties and rewards to assure continued high quality service and reliability.
In April 1999, LG&E filed a joint agreement with KU and the Kentucky Attorney General to adopt the PBR plan subject to certain amendments. The Kentucky Commission issued initial orders implementing the amended PBR plan, effective July 1999, and subject to modification. The Kentucky Commission also consolidated into the continuing PBR proceedings an earlier March 1999, rate complaint by a group of industrial intervenors, KIUC, in which KIUC requested significant reductions in electric rates. Hearings were conducted before the Kentucky Commission on LG&E's amended PBR plan and the KIUC rate reduction petitions in August and September 1999.
In January 2000, the Kentucky Commission issued orders for LG&E in the subject cases, ruling that LG&E should reduce base rates by $27.2 million effective with bills rendered beginning March 1, 2000. The Kentucky Commission eliminated LG&E's proposal to operate under its PBR plan and reinstated the FAC mechanism effective March 1, 2000. The Kentucky Commission offered LG&E the opportunity to operate under an ESM for the next three years. Under this mechanism, incremental annual earnings resulting in a rate of return on equity either above or below a range of 10.5% to 12.5% would be shared 60% with shareholders and 40% with ratepayers.
Later in January 2000, LG&E filed motions for correction to the January 2000 orders for computational and other errors made in the Kentucky Commission's orders which produced overstatements in the base rate reductions to LG&E of $1.1 million. In February 2000, LG&E accepted the Kentucky Commission's proposed ESM and filed an ESM tariff which contained detailed provisions for operation of the ESM rates. In June 2000, the Kentucky Commission ruled that the final rate reduction should be $26.3 million, a change of approximately $900,000 and ordered LG&E to implement the revised rates effective with service rendered beginning June 1, 2000. LG&E reinstated its FAC beginning with March 2000 billings.
The first ESM filing was made on March 1, 2001, for year ended December 31, 2000. By order of the Kentucky Commission rate changes prompted by the ESM filing go into effect in April of each year. At December 31, 2000, LG&E recorded in its financial statements an estimated refund to ratepayers of $2.5 million.
DSM
LG&E's rates contain a DSM provision. The provision includes a rate mechanism that provides concurrent recovery of DSM costs and provides an incentive for implementing DSM programs. This program had allowed LG&E to recover revenues from lost sales associated with the DSM program (decoupling), but in 1998, LG&E and customer interest groups requested an end to the then current form of the decoupling rate mechanism. In September 1998, the Kentucky Commission accepted
10
LG&E's modified tariff discontinuing the decoupling mechanism effective as of June 1, 1998. In September 2000, LG&E filed a plan to continue DSM programming with the Kentucky Commission. This filing calls for the expansion of the DSM programs into the service territory served by KU and proposes a mechanism to recover revenues from lost sales associated with DSM programs based on program planning engineering estimates and post-implementation evaluation.
Gas PBR
Since October 1997, LG&E has implemented an experimental performance-based ratemaking mechanism related to gas procurement activities and off-system gas sales only. During the three-year test period beginning October 1997, rate adjustments related to this mechanism will be determined for each 12-month period beginning November 1 and ending October 31. Since its implementation on November 1, 1997, through October 31, 2000, LG&E has achieved $19.6 million in savings. Of the total savings, LG&E has retained $8.9 million, and the remaining portion of $10.7 million has been shared with customers. In December 2000, LG&E filed an Application reporting on the operation of the experimental PBR and requested the Kentucky Commission to extend the PBR for an additional five years as a result of the benefits provided to both LG&E and its customers during the preceding three year experimental period. A ruling is expected by the summer of 2001.
FAC
Prior to implementation of the PBR in July 1999, and following its termination in March 2000, LG&E employed an FAC mechanism, which under Kentucky law allowed LG&E to recover from customers, the actual fuel costs associated with retail electric sales. In February 1999, LG&E received orders from the Kentucky Commission requiring a refund to retail electric customers of approximately $3.9 million resulting from reviews of the FAC from November 1994, through April 1998, of which $1.9 million was refunded in April 1999, for the period beginning November 1994, and ending October 1996. The orders changed LG&E's method of computing fuel costs associated with electric line losses on wholesale sales appropriate for recovery through the FAC. Following rehearing in December 1999, the Kentucky Commission agreed with LG&E's position on the appropriate loss factor to use in the FAC computation and issued an order reducing the refund level for the 18-month period under review to approximately $800,000. LG&E enacted the refund with billings in the month of January 2000. LG&E and KIUC each filed separate appeals from the Kentucky Commission's February 1999 orders with the Franklin County, Kentucky Circuit Court and in May 2000, the Court affirmed the Kentucky Commission's orders regarding the amounts disallowed and ordered the case remanded as to the Kentucky Commission's denial of interest, directing the Kentucky Commission to determine whether interest should be awarded to LG&E's ratepayers. In June 2000, LG&E appealed the Circuit Court's decision to the Kentucky Court of Appeals. A final decision on the appeal is not expected until late 2001 or early 2002.
Gas Rate Case
In March 2000, LG&E filed an application with the Kentucky Commission requesting an adjustment in LG&E's gas rates. LG&E asked for a general adjustment in gas rates for a test year for the twelve months ended December 31, 1999. The revenue increase applied for was $26.4 million. The Kentucky Commission subsequently suspended the effective date of the proposed new tariffs, and held hearings during August 2000. In September 2000, the Kentucky Commission granted LG&E an annual increase in its base gas revenues of $20.2 million effective September 28, 2000. The Kentucky Commission authorized a return on equity of 11.25%. The Kentucky Commission approved LG&E's proposal for a weather normalization billing adjustment mechanism that will normalize the effect of weather on revenues from gas sales. In October 2000, the Kentucky Attorney General requested that the Kentucky Commission grant rehearing on a single revenue requirements issue (normalization of
11
forfeited discounts) on the grounds that the September order did not rule on or otherwise discuss the issue. In November 2000, the Kentucky Commission granted the Attorney General's request for rehearing, rejected the Attorney General's proposed adjustment to normalize the level of forfeited discounts, and ordered that its September 2000 order be modified to reflect its findings on the issue.
Kentucky Commission Administrative Case for Affiliate Transactions
In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Kentucky Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility operations and affiliates. The Kentucky Commission intends to address two major areas in the proceedings: the tools and conditions needed to prevent cost shifting and cross-subsidization between regulated and non-utility operations; and whether a code of conduct should be established to assure that non-utility segments of the holding company are not engaged in practices that could result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Kentucky Commission issued a draft code of conduct and cost allocation guidelines. In January 1999, LG&E, as well as all parties to the proceeding, filed comments on the Kentucky Commission draft proposals. In December 1999, the Kentucky Commission issued guidelines on cost allocation and held a hearing in January 2000, on the draft code of conduct. In February 2000, the Kentucky Commission issued a draft Code of Conduct for the purpose of further consideration in the process to promulgate a regulation. In early 2000, the Kentucky General Assembly enacted legislation, House Bill 897, which authorized the Kentucky Commission to require utilities who provide nonregulated activities to keep separate accounts and allocate costs in accordance with procedures established by the Kentucky Commission. On February 14, 2001, the Kentucky Commission published notice of their intent to promulgate new administrative regulations. In the same Bill, the General Assembly set forth provisions to govern a utilities activities related to the sharing of information, databases, and resources between its employees or an affiliate involved in the marketing or the provision of nonregulated activities and its employees or an affiliate involved in the provision of regulated services. The legislation became law in July 2000 and LG&E has been operating pursuant thereto since that time.
Environmental Matters
The Clean Air Act imposed stringent new SO₂ and NOx emission limits on electric generating units. LG&E previously had installed scrubbers on all of its generating units. LG&E's strategy for Phase II SO₂ reductions, which commenced January 1, 2000, is to increase scrubber removal efficiency to delay additional capital expenditures and may also include fuel switching or upgrading scrubbers. LG&E met the NOx emission requirements of the Act through installation of low-NOx burner systems. LG&E's compliance plans are subject to many factors including developments in the emission allowance and fuel markets, future regulatory and legislative initiatives, and advances in clean air control technology. LG&E will continue to monitor these developments to ensure that its environmental obligations are met in the most efficient and cost-effective manner.
In September 1998, the EPA announced its final "NOx SIP Call" rule requiring states to impose significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport impacts on the Northeast region. The Commonwealth of Kentucky is currently in the process of revising its State Implementation Plan or "SIP" to require reductions in NOx emissions from coal-fired generating units to the 0.15 lb./Mmbtu level on a system-wide basis. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule pursuant to Section 126 of the Clean Air Act directing similar NOx reductions from a number of specifically targeted generating units including all LG&E units. Both rules were appealed to the U.S. Court of Appeals for the D.C. Circuit. The D.C. Circuit subsequently upheld most provisions of the NOx SIP Call rule, but extended the compliance date to May 2004. As the court has yet to issue a final
12
ruling on the Section 126 rule, all LG&E generating units remain subject to the May 2003 compliance date under that rule. LG&E continues to monitor the status of various appeals pending in the D.C. Circuit and U.S. Supreme Court.
LG&E is currently implementing a plan for adding significant additional NOx controls to its generating units. Installation of additional NOx controls will proceed on a phased basis, with installation of controls commencing in late 2000 and continuing through the final compliance date. LG&E estimates that it will incur total capital costs of approximately $160 million to reduce its NOx emissions to the 0.15 lb./Mmbtu level on a company-wide basis. In addition, LG&E will incur additional operating and maintenance costs in operating new NOx controls. LG&E believes its costs in this regard to be comparable to those of similarly situated utilities with like generation assets. LG&E anticipates that such capital and operating costs are the type of costs that are eligible for recovery from customers under its environmental surcharge mechanism and believes that a significant portion of such costs could be recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of recovery.
LG&E is also monitoring several other air quality issues which may potentially impact coal-fired power plants, including the appeal of the D.C. Circuit's remand of the EPA's revised air quality standards for ozone and particulate matter, measures to implement EPA's regional haze rule, and EPA's December 2000 determination to regulate mercury emissions from power plants. In addition, LG&E is currently working with local regulatory authorities to review the effectiveness of remedial measures aimed at controlling particulate matter emissions from its Mill Creek Station. LG&E previously settled a number of property damage claims from adjacent residents and completed significant remedial measures as part of its ongoing capital construction program.
LG&E owns or formerly owned three properties which are the location of past MGP operations. Various contaminants are typically found at such former MGP sites and environmental remediation measures are frequently required. With respect to the sites, LG&E has completed cleanups, obtained regulatory approval of site management plans, or reached agreements for other parties to assume responsibility for cleanup. Based on currently available information, management estimates that it will incur additional costs of $400,000. Accordingly, an accrual of $400,000 has been recorded in the accompanying financial statements.
See Note 12 of LG&E's Notes to Financial Statements under Item 8 for an additional discussion of environmental issues.
FUTURE OUTLOOK
Competition and Customer Choice
LG&E has moved aggressively over the past decade to be positioned for, and to help promote, the energy industry's shift to customer choice and a competitive market for energy services. Specifically, LG&E has taken many steps to prepare for the expected increase in competition in its business, including support for performance-based ratemaking structures, aggressive cost reduction activities; strategic acquisitions, dispositions and growth initiatives; write-offs of previously deferred expenses; an increase in focus on commercial and industrial customers; an increase in employee training; and necessary corporate and business unit realignments. LG&E continues to be active in the national debate surrounding the restructuring of the energy industry and the move toward a competitive, market-based environment. LG&E has urged Congress to set a specific date for a complete transition to a competitive market, one that will quickly and efficiently bring the benefits associated with customer choice. LG&E has previously advocated the implementation of this transition by January 1, 2001, and now recommends adoption of federal legislation specifying a date certain and appropriate transition regulations implementing deregulation.
13
In December 1997, the Kentucky Commission issued a set of principles which was intended to serve as its guide in consideration of issues relating to industry restructuring. Among the issues addressed by these principles are: consumer protection and benefit, system reliability, universal service, environmental responsibility, cost allocation, stranded costs and codes of conduct. During 1998, the Kentucky Commission and a task force of the Kentucky General Assembly had each initiated proceedings, including meetings with representatives of utilities, consumers, state agencies and other groups in Kentucky, to discuss the possible structure and effects of energy industry restructuring in Kentucky.
In November 1999, the task force issued a report to the Governor of Kentucky and a legislative agency recommending no general electric industry restructuring actions during the 2000 legislative session and no such actions were taken at the 2000 or 2001 legislative session.
Thus, at the time of this report, neither the Kentucky General Assembly nor the Kentucky Commission has adopted or approved a plan or timetable for retail electric industry competition in Kentucky. The nature or timing of the ultimate legislative or regulatory actions regarding industry restructuring and their impact on LG&E, which may be significant, cannot currently be predicted.
While many states have moved forward in providing retail choice, many others have not. Some are reconsidering their initiatives and have even delayed implementation. Recent activities in California that have resulted in extremely high wholesale (and in some cases, consumer) electric prices are becoming significant factors in the deliberations by other states.
14

Louisville Gas and Electric Company
Statements of Income
(Thousands of $)

YEARS ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
-------- -------- --------

Balance January 1 ............................. $258,910 $209,222 $181,049
Add net income ................................ 78,120 113,273 107,941
-----------------------------------
337,030 322,495 288,990
-----------------------------------

Deduct: Cash dividends declared on stock:
5% cumulative preferred ............ 1,075 1,075 1,075
Auction rate cumulative preferred .. 2,024 2,041 2,024
$5.875 cumulative preferred ........ 1,469 1,469 1,469
Common ............................. 85,000 59,000 75,200
-----------------------------------
89,568 63,585 79,768
-----------------------------------
Balance December 31 ........................... $247,462 $258,910 $209,222
-----------------------------------
-----------------------------------

Years Ended December 31
2000 1999 1998
OPERATING REVENUES:
Electric $ 713,458 $ 792,405 $ 663,011
Gas 272,489 177,579 191,545
Provision for rate refunds (Note 3) (2,500 ) (1,735 ) (4,500 )
Total operating revenues (Note 1) 983,447 968,249 850,056
OPERATING EXPENSES:
Fuel for electric generation 159,418 159,129 154,683
Power purchased 96,894 169,573 50,176
Gas supply expenses 196,912 114,745 125,894
Other operation expenses 135,943 154,667 163,584
Maintenance 63,709 58,119 52,786
Depreciation and amortization 98,291 97,221 93,178
Federal and state income taxes (Note 8) 64,425 57,774 56,307
Property and other taxes 18,985 16,930 17,925
Total operating expenses 834,577 828,158 714,533
Net operating income 148,870 140,091 135,523
Merger costs (Note 2) — — 32,072
Other income—net (Note 9) 4,921 4,141 10,991
Interest charges 43,218 37,962 36,322
Net income 110,573 106,270 78,120
Preferred stock dividends 5,210 4,501 4,568
Net income available for common stock $ 105,363 $ 101,769 $ 73,552
Statements of Retained Earnings
(Thousands of $)
Years Ended December 31
2000 1999 1998
Balance January 1 $ 259,231 $ 247,462 $ 258,910
Add net income 110,573 106,270 78,120
369,804 353,732 337,030
Deduct:
Cash dividends declared on stock:
5% cumulative preferred 1,075 1,075 1,075
Auction rate cumulative preferred 2,666 1,957 2,024
$5.875 cumulative preferred 1,469 1,469 1,469
Common 50,000 90,000 85,000
55,210 94,501 89,568
Balance December 31 $ 314,594 $ 259,231 $ 247,462
The accompanying notes are an integral part of these financial statements.

LOUISVILLE GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Thousands
15

Louisville Gas and Electric Company
Statements of Comprehensive Income
(Thousands of $)
YEARS ENDED DECEMBER 31
-------------------------------------
1998 1997 1996
--------- --------- ---------

Cash Flows from Operating Activities
Net Income ...................................................... $ 78,120 $ 113,273 $ 107,941
Items not requiring cash currently:
Depreciation and amortization ................................ 93,178 93,020 89,002
Deferred income taxes-net .................................... 2,747 (3,495) 26,055
Investment tax credit-net .................................... (4,258) (4,240) (3,997)
Other ........................................................ 5,534 4,640 3,911
Changes in certain net current assets:
Accounts receivable .......................................... (17,708) (9,728) (9,555)
Materials and supplies ....................................... 423 (8,492) (1,418)
Accounts payable ............................................. 34,779 1,416 3,772
Provision for rate refunds ................................... 13 (4,263) (10,789)
Accrued taxes ................................................ 13,206 6,741 4,168
Accrued interest ............................................. 22 (1,978) (1,070)
Prepayments and other ........................................ 976 1,333 685
Other ........................................................... 18,679 (3,188) (23,153)
-------------------------------------
Net cash flows from operating activities ..................... 225,711 185,039 185,552
-------------------------------------
Cash Flows from Investing Activities
Purchases of securities ......................................... (17,397) (18,529) (11,039)
Proceeds from sales of securities ............................... 18,841 2,544 28,605
Construction expenditures ....................................... (138,345) (110,893) (107,879)
-------------------------------------
Net cash flows from investing activities ..................... (136,901) (126,878) (90,313)
-------------------------------------
Cash Flows from Financing Activities
Issuance of first mortgage bonds and pollution control bonds .... -- 69,776 49,745
Retirement of first mortgage bonds and pollution control bonds .. (20,000) (71,693) (67,013)
Payment of dividends ............................................ (87,552) (62,564) (79,310)
-------------------------------------
Net cash flows from financing activities ..................... (107,552) (64,481) (96,578)
-------------------------------------

Change in Cash and Temporary Cash Investments ...................... (18,742) (6,320) (1,339)

Cash and Temporary Cash Investments at Beginning of Year ........... 50,472 56,792 58,131
-------------------------------------

Cash and Temporary Cash Investments at End of Year ................. $ 31,730 $ 50,472 $ 56,792
-------------------------------------
-------------------------------------

Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Income taxes ................................................. $ 40,334 $ 63,421 $ 41,508
Interest on borrowed money ................................... 34,245 39,582 40,334

Years Ended December 31
2000 1999 1998
Net income available for common stock $ 105,363 $ 101,769 $ 73,552
Unrealized holding losses on available-for-sale securities arising during the period — (402 ) (14 )
Income tax (expense) benefit related to items of other comprehensive income — 163 (18 )
Comprehensive income $ 105,363 $ 101,530 $ 73,520
The accompanying notes are an integral part of these financial statements.

LOUISVILLE GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Thousands
16

Louisville Gas and Electric Company
Balance Sheets
(Thousands of $)

Assets DECEMBER 31
------------------------
1998 1997
----------- ---------

Utility Plant, at original cost
Electric ............................................................ $2,268,860 $2,242,980
Gas ................................................................. 339,647 337,619
Common .............................................................. 131,271 137,496
------------------------
2,739,778 2,718,095
Less: Reserve for depreciation ..................................... 1,144,123 1,072,842
------------------------
1,595,655 1,645,253
Construction work in progress ....................................... 156,361 61,139
------------------------
1,752,016 1,706,392
------------------------
Other Property and Investments - less reserve .......................... 1,154 1,365
------------------------

Current Assets
Cash and temporary cash investments ................................. 31,730 50,472
Marketable securities (Note 6) ...................................... 17,851 19,311
Accounts receivable-less reserve of $1,399 in 1998 and $1,295 in 1997 142,580 124,872
Materials and supplies-at average cost
Fuel (predominantly coal) ....................................... 23,993 17,651
Gas stored underground .......................................... 33,485 41,487
Other ........................................................... 33,103 31,866
Prepayments ......................................................... 2,285 2,627
------------------------
285,027 288,286
------------------------

Deferred Debits and Other Assets
Unamortized debt expense ............................................ 5,919 6,074
Regulatory assets (Note 3) .......................................... 37,643 24,899
Other ............................................................... 22,878 28,625
------------------------
66,440 59,598
------------------------
$2,104,637 $2,055,641
------------------------
------------------------

Capital and Liabilities

Capitalization (see Statements of Capitalization)
Common equity ....................................................... $ 671,846 $ 683,326
Cumulative preferred stock .......................................... 95,328 95,328
Long-term debt (Note 10) ............................................ 626,800 626,800
------------------------
1,393,974 1,405,454
------------------------

Current Liabilities
Long-term debt due within one year .................................. -- 20,000
Accounts payable .................................................... 133,673 98,894
Provision for rate refunds .......................................... 13,261 13,248
Dividends declared .................................................. 23,168 21,152
Accrued taxes ....................................................... 31,929 18,723
Accrued interest .................................................... 8,038 8,016
Other ............................................................... 15,242 14,608
------------------------
225,311 194,641
------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Notes 1 and 8) ................... 254,589 249,851
Investment tax credit, in process of amortization ................... 71,542 75,800
Accumulated provision for pensions and related benefits (Note 7) .... 59,529 33,872
Customers' advances for construction ................................ 10,848 10,385
Regulatory liability (Note 3) ....................................... 63,529 65,502
Other ............................................................... 25,315 20,136
------------------------
485,352 455,546
------------------------
Commitments and Contingencies (Note 12)
$2,104,637 $2,055,641
------------------------
------------------------

December 31
2000 1999
ASSETS:
Utility plant, at original cost (Note 1):
Electric $ 2,459,206 $ 2,396,707
Gas 389,371 365,128
Common 148,530 141,009
2,997,107 2,902,844
Less: reserve for depreciation 1,296,865 1,215,032
1,700,242 1,687,812
Construction work in progress 189,218 162,995
1,889,460 1,850,807
Other property and investments—less reserve 1,357 1,224
Current assets:
Cash and temporary cash investments 2,495 54,761
Marketable securities (Note 6) 4,056 6,936
Accounts receivable—less reserve of $1,286 in 2000 and $1,233 in 1999 170,852 113,859
Materials and supplies—at average cost:
Fuel (predominantly coal) 9,325 17,350
Gas stored underground 54,441 38,780
Other 31,685 35,010
Prepayments and other 1,317 2,775
274,171 269,471
Deferred debits and other assets:
Unamortized debt expense 5,784 5,607
Regulatory assets (Note 3) 36,808 31,443
Other 18,504 12,900
61,096 49,950
$ 2,226,084 $ 2,171,452
CAPITAL AND LIABILITIES:
Capitalization (see statements of capitalization):
Common equity $ 778,928 $ 683,376
Cumulative preferred stock 95,140 95,328
Long-term debt (Note 10) 360,600 380,600
1,234,668 1,159,304
Current liabilities:
Current portion of long-term debt (Note 10) 246,200 246,200
Notes payable (Note 11) 114,589 120,097
Accounts payable 134,392 113,008
Provision for rate refunds 2,500 8,962
Dividends declared 1,367 24,236
Accrued taxes 8,073 23,759
Accrued interest 6,350 9,265
Other 15,826 15,725
529,297 561,252
Deferred credits and other liabilities:
Accumulated deferred income taxes (Notes 1 and 8) 289,232 255,910
Investment tax credit, in process of amortization 62,979 67,253
Accumulated provision for pensions and related benefits (Note 7) 31,257 38,431
Customers' advances for construction 9,578 11,104
Regulatory liabilities (Note 3) 55,152 58,726
Other 13,921 19,472
462,119 450,896
Commitments and contingencies (Note 12) $ 2,226,084 $ 2,171,452
The accompanying notes are an integral part of these financial statements.

LOUISVILLE GAS AND ELECTRIC COMPANY
STATEMENTS OF CAPITALIZATION
(Thousands
17

Louisville Gas and Electric Company
Statements of Cash Flows
(Thousands of $)

DECEMBER 31
----------------------------
1998 1997
----------- ----------

Common Equity
Common stock, without par value -
Authorized 75,000,000 shares, outstanding 21,294,223 shares .............. $ 425,170 $ 425,170
Common stock expense ......................................................... (836) (836)
Unrealized gain on marketable securities, net of income
taxes of $34 in 1998 and $16 in 1997 (Note 6) ............................ 50 82
Retained earnings ............................................................ 247,462 258,910
----------------------------
671,846 683,326
----------------------------

Cumulative Preferred Stock
Redeemable on 30 days notice by the Company

SHARES CURRENT
OUTSTANDING REDEMPTION PRICE
$25 par value, 1,720,000 shares authorized -
5% series ..................................... 860,287 $ 28.000 21,507 21,507
Without par value, 6,750,000 shares authorized -
Auction Rate .................................. 500,000 100.000 50,000 50,000
$5.875 series ................................. 250,000 105.875 25,000 25,000
Preferred stock expense (1,179) (1,179)
----------------------------
95,328 95,328
----------------------------
Long-Term Debt (Note 10)
First mortgage bonds -
Series due July 1, 2002, 7 1/2% ........................................... 20,000 20,000
Series due August 15, 2003, 6% ............................................ 42,600 42,600
Pollution control series:
P due June 15, 2015, 7.45% ............................................ 25,000 25,000
Q due November 1, 2020, 7 5/8% ........................................ 83,335 83,335
R due November 1, 2020, 6.55% ......................................... 41,665 41,665
S due September 1, 2017, variable ..................................... 31,000 31,000
T due September 1, 2017, variable ..................................... 60,000 60,000
U due August 15, 2013, variable ....................................... 35,200 35,200
V due August 15, 2019, 5 5/8% ......................................... 102,000 102,000
W due October 15, 2020, 5.45% ......................................... 26,000 26,000
X due April 15, 2023, 5.90% ........................................... 40,000 40,000
----------------------------
Total first mortgage bonds ................................................ 506,800 506,800
Pollution control bonds (unsecured) -
Jefferson County Series due September 1, 2026, variable ............... 22,500 22,500
Trimble County Series due September 1, 2026, variable ................. 27,500 27,500
Jefferson County Series due November 1, 2027, variable ................ 35,000 35,000
Trimble County Series due November 1, 2027, variable .................. 35,000 35,000
----------------------------
Total unsecured pollution control bonds ................................... 120,000 120,000
----------------------------
Total long-term bonds ..................................................... 626,800 626,800
----------------------------
Total Capitalization ............................................................. $ 1,393,974 $1,405,454
----------------------------
----------------------------

Years Ended December 31
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 110,573 $ 106,270 $ 78,120
Items not requiring cash currently:
Depreciation and amortization 98,291 97,221 93,178
Deferred income taxes—net 31,020 (5,279 ) 2,747
Investment tax credit—net (4,274 ) (4,289 ) (4,258 )
Other 8,481 6,924 5,534
Change in certain net current assets:
Accounts receivable (56,993 ) 28,721 (17,708 )
Materials and supplies (4,311 ) (559 ) 423
Accounts payable 21,384 (20,665 ) 34,779
Provision for rate refunds (6,462 ) (4,299 ) 13
Accrued taxes (15,686 ) (8,170 ) 13,206
Accrued interest (2,915 ) 1,227 22
Prepayments and other 1,561 (7 ) 976
Other (24,431 ) (16,602 ) 18,679
Net cash flows from operating activities 156,238 180,493 225,711
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (708 ) (1,144 ) (17,397 )
Proceeds from sales of securities 4,089 11,662 18,841
Construction expenditures (144,216 ) (194,644 ) (138,345 )
Net cash flows used for investing activities (140,835 ) (184,126 ) (136,901 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowing (5,508 ) 120,097 —
Issuance of pollution control bonds 106,545 — —
Retirement of first mortgage bonds and pollution control bonds (130,627 ) — (20,000 )
Additional paid-in capital 40,000 — —
Payment of dividends (78,079 ) (93,433 ) (87,552 )
Net cash flows from financing activities (67,669 ) 26,664 (107,552 )
Change in cash and temporary cash investments (52,266 ) 23,031 (18,742 )
Cash and temporary cash investments at beginning of year 54,761 31,730 50,472
Cash and temporary cash investments at end of year $ 2,495 $ 54,761 $ 31,730
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 46,562 $ 76,761 $ 40,334
Interest on borrowed money 42,958 33,507 34,245 The accompanying notes are an integral part of these financial statements.

LOUISVILLE GAS AND ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(Thousands
18

Louisville Gas and Electric Company
Statements of Capitalization
(Thousands of $)

YEARS ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
--------- --------- ---------

Net income available for common stock .............................. $ 73,552 $ 108,688 $ 103,373
Unrealized holding gains (losses) on available-for-sale securities
arising during the period ...................................... (14) (426) 169
Reclassification adjustment for realized losses on
available-for-sale securities included in net income .......... -- 188 547
-----------------------------------
Other comprehensive income (loss), before tax ...................... (14) (238) 716
Income tax expense (benefit) related to items of other comprehensive
income ........................................................ 18 (119) 289
-----------------------------------
Comprehensive income ............................................... $ 73,520 $ 108,569 $ 103,800
-----------------------------------
-----------------------------------

December 31
2000 1999
COMMON EQUITY:
Common stock, without par value—
Authorized 75,000,000 shares, outstanding 21,294,223 shares $ 425,170 $ 425,170
Common stock expense (836 ) (836 )
Additional paid-in capital 40,000 —
Unrealized loss on marketable securities, net of income taxes ($128) in 1999 (Note 6) — (189 )
Retained earnings 314,594 259,231
778,928 683,376
CUMULATIVE PREFERRED STOCK:
Redeemable on 30 days notice by LG&E
Shares
Outstanding Current
Redemption Price
$25 par value, 1,720,000 shares authorized—
5% series 860,287 $ 28.00 21,507 21,507
Without par value, 6,750,000 shares authorized—
Auction rate 500,000 100.00 50,000 50,000
$5.875 series 250,000 103.53 25,000 25,000
Preferred stock expense (1,367 ) (1,179 )
95,140 95,328
LONG-TERM DEBT (Note 10):
First mortgage bonds—
Series due July 1, 2002, 7¹/2% — 20,000
Series due August 15, 2003, 6% 42,600 42,600
Pollution control series:
P due June 15, 2015, 7.45% — 25,000
Q due November 1, 2020, 7⁵/8% — 83,335
R due November 1, 2020, 6.55% 41,665 41,665
S due September 1, 2017, variable 31,000 31,000
T due September 1, 2017, variable 60,000 60,000
U due August 15, 2013, variable 35,200 35,200
V due August 15, 2019, 5⁵/8% 102,000 102,000
W due October 15, 2020, 5.45% 26,000 26,000
X due April 15, 2023, 5.90% 40,000 40,000
Y due May 1, 2027, variable 25,000 —
Z due August 1, 2030, variable 83,335 —
Total first mortgage bonds 486,800 506,800
Pollution control bonds (unsecured)—
Series due September 1, 2026, variable 22,500 22,500
Series due September 1, 2026, variable 27,500 27,500
Series due November 1, 2027, variable 35,000 35,000
Series due November 1, 2027, variable 35,000 35,000
Total unsecured pollution control bonds 120,000 120,000
Total bonds outstanding 606,800 626,800
Less current portion of long-term debt 246,200 246,200
Long-term debt 360,600 380,600
Total capitalization $ 1,234,668 $ 1,159,304
The accompanying notes are an integral part of these financial statements.

LOUISVILLE GAS AND ELECTRIC COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

19
Louisville Gas and Electric Company (LG
Notes to Financial Statements
Note 1—Summary of Significant Accounting Policies
LG&E, or the Company) is a subsidiary of LG&E Energy Corp. The Companyand an indirect subsidiary of Powergen, is a regulated public utility that is engaged in the generation, transmission, distribution, and sale of electric energy and the storage, distribution, and sale of natural gas in Louisville and adjacent areas in Kentucky. LG&E Energy Corp. is an exempt energy servicespublic utility holding company with wholly-owned subsidiaries consisting of the Company, Kentucky Utilities Company
(KU)including LG&E, KU, Capital Corp., LEM, and LG&E Capital Corp. (Capital Corp.).Services. All of the Company'sLG&E's Common Stock is held by LG&E Energy.
On December 11, 2000, LG&E Energy Corp. UTILITY PLANT. The Company'sand Powergen plc completed the merger involving the two companies. Powergen is a registered public utility holding company under PUHCA. No costs associated with the Powergen merger nor any of the effects of purchase accounting have been reflected in the financial statements of LG&E.
Utility Plant. LG&E's plant is stated at original cost, which includes payroll-related costs such as taxes, fringe benefits, and administrative and general costs. Construction work in progress has been included in the rate base for determining retail customer rates. The CompanyLG&E has not recorded any allowance for funds used during construction.
The cost of plant retired or disposed of in the normal course of business is deducted from plant accounts and such cost, plus removal expense less salvage value, is charged to the reserve for depreciation. When complete operating units are disposed of, appropriate adjustments are made to the reserve for depreciation and gains and losses, if any, are recognized.

DEPRECIATION.
Depreciation. Depreciation is provided on the straight-line method over the estimated service lives of depreciable plant. The amounts provided for 2000 were 3.6% (3.3% electric, 3.8% gas and 7.3% common); for 1999 were 3.4% (3.2% electric, 3.2% gas, and 7.1% common); and for 1998 were 3.4% (3.2% electric, 3.4% gas, and 7.4% common); for 1997 were 3.4% (3.2%
electric, 3.3% gas, and 6% common); and for 1996 were 3.3% (3.2% electric, 3.3%
gas, and 6% common) of average depreciable plant.

CASH AND TEMPORARY CASH INVESTMENTS.
Pursuant to a recently completed depreciation study, LG&E will implement new depreciation rates as of January 1, 2001. The Companynew rates are expected to be 3.5% (3.3% electric, 3.4% gas, and 7.3% common).
Cash and Temporary Cash Investments. LG&E considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Temporary cash investments are carried at cost, which approximates fair value.

GAS STORED UNDERGROUND.
Gas Stored Underground. Gas inventories of $33$54.4 million and $41$38.8 million at December 31, 19982000 and 1997,1999, respectively, are included in gas stored underground in the balance sheet. The inventory is accounted for using the average-cost method.

FINANCIAL INSTRUMENTS. The Company
Financial Instruments. LG&E uses over-the-counter interest-rate swap agreements to hedge its exposure to fluctuations in the interest rates it pays on variable-rate debt, and itdebt. LG&E also uses exchange-traded U.S. Treasury note and bond futures to hedge its exposure to fluctuations in the value of its investments in the preferred stocks of other companies. Gains and losses on interest-rate swaps used to hedge interest rate risk 6

are reflected in interest charges monthly. Gains and losses on U.S. Treasury note and bond futures used to hedge investments in preferred stocks are initially deferred and classified as unrealized gains or losses on marketable
securities in common equity and then charged or credited to other income and
deductions when the securitiesincome—net. The treasury futures are sold.now listed as assets held for sale. See Note 4, Financial Instruments.

In connection with the Company's marketing of power from owned generation
assets, exchange traded futures are used to hedge market risk associated with
price fluctuations for commitments to sell or purchase electricity. Gains and
losses on these futures contracts are reflected in other income and deductions,
but are immaterial to the Company's results of operations. At December 31, 1998,
the value of these futures contracts was not material to the Company's financial
position.

DEBT EXPENSE.
Debt Expense. Debt expense is amortized over the lives of the related bond issues, consistent with regulatory practices.

DEFERRED INCOME TAXES.
20
Deferred Income Taxes. Deferred income taxes have been provided for all material book-tax temporary differences.

INVESTMENT TAX CREDITS.
Investment Tax Credits. Investment tax credits resulted from provisions of the tax law that permitted a reduction of the Company'sLG&E's tax liability based on credits for certain construction expenditures. Deferred investment tax credits are being amortized to income over the estimated lives of the related property that gave rise to the credits.

REVENUE RECOGNITION.
Revenue Recognition. Revenues are recorded based on service rendered to customers through month-end. The CompanyLG&E accrues an estimate for unbilled revenues from each meter reading date to the end of the accounting period. The unbilled revenue estimates included in accounts receivable for LG&E at December 31, 2000 and 1999, were approximately $62.8 million and $31.1 million, respectively. Under an agreement approved by the Public ServiceKentucky Commission of Kentucky (Kentucky
Commission or Commission) in 1994, the CompanyLG&E implemented a demand side management program, including a "decoupling mechanism" which allowed the CompanyLG&E to recover a predetermined level of revenue on electric and gas residential sales. In 1998, the decoupling mechanism was suspended. See Note 3, Rates and Regulatory Matters.

FUEL AND GAS COSTS.
Fuel and Gas Costs. The cost of fuel for electric generation is charged to expense as used, and the cost of gas supply is charged to expense as delivered to the distribution system. The CompanyLG&E implemented a Kentucky Commission-approved experimental performance-based ratemaking mechanism related to gas procurement and off-system gas sales activity.activity in October 1997. See Note 3, Rates and Regulatory Matters.

MANAGEMENT'S USE OF ESTIMATES.
Management's Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent items at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. See Note 12, Commitments and Contingencies, for a further discussion.

NEW ACCOUNTING PRONOUNCEMENTS.
New Accounting Pronouncements. During 1998, the Company adopted2000 and 1999, the following accounting pronouncements:

Statements of Financial Accounting Standards No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS (SFAS No. 132), No. 130,
REPORTING COMPREHENSIVE INCOME (SFAS No. 130), and No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (SFAS No. 131). Pursuant topronouncements were issued that affect LG&E:
SFAS No. 132, the Company has disclosed additional information on changes in
benefit obligations133,Accounting for Derivative Instruments and fair values of plan assets and eliminated certain
disclosures that are no longer relevant. This standard does not change the
measurement or financial statement recognition of the plans. See Note 7,
Pension Plans and Retirement Benefits. Under SFAS No. 131, the Company has
provided information about its various business segments that is intended to
allow readers to view certain financial information as if "through the eyes
of management". See Note 14, Segments of Business and Related Information.
Pursuant to SFAS No. 130, the Company has presented information in the
Statements of Comprehensive Income that measures changes in equity that are
not required to be recorded as a component of net income. These standards had
no impact on the calculation of net income presented in the Statements of
Income.

Statement of Position No. 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE (SOP 98-1). SOP 98-1, adopted as of
January 1, 1998, clarifies the criteria for capital or expense treatment of
costs incurred by an enterprise to develop or obtain computer software to be
used in its internal operations. The statement does not change treatment of
costs incurred in connection with correcting computer programs to properly
process the millennium change to the Year 2000, which must be expensed as
incurred. Adoption of SOP 98-1 did not have a material effect on the
Company's financial statements.

The following accounting pronouncements have been issued but are not yet
effective:

Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The statement is effective for
fiscal years beginning after June 15, 1999, andHedging Activities, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded inon the balance sheet as either an asset or a liability measured at its fair value. The
statementSFAS 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 a companyLG&E must formally document, designate, and assess the effectiveness of transactions that usereceive hedge accounting. The Company is
currently analyzing the provisions of the statement and cannot predict the
impact this statement will have on its results of operations and financial
position, however, the statementSFAS 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 adopted SFAS No. 133 on January 1, 2001. The effect of this statement will be recorded ina charge of $3.6 million to cumulative effect of change in accounting when adopted.

Emerging Issues Task Force Issueprinciple (net of tax) in other comprehensive income.
EITF No. 98-10, ACCOUNTING FOR ENERGY TRADING AND
RISK MANAGEMENT ACTIVITIES (EITF No. 98-10). ThisAccounting for Energy Trading and Risk Management Activities was adopted effective January 1, 1999. The pronouncement is effective
for fiscal years beginning after December 15, 1998. The task force concluded
thatrequires energy trading contracts shouldto be recorded at markmarked to market on the balance sheet, with the gains and losses shown net in the income statement. EITF No. 98-10 more broadly defines what represents energy trading to include economic activities related to
21
physical assets which were not previously marked to market by established industry practice. The effects of adopting
EITF No. 98-10, if applicable, will be reported as a cumulative effect of a
change in accounting principle

with no prior period restatement. The Company does not expect the adoptionAdoption of EITF No. 98-10 todid not have a material adverse impact on itsLG&E's consolidated results of operations andor financial position.

NOTE 2 - MERGER
Note 2—Mergers and Acquisitions
On December 11, 2000, LG&E Energy Corp. and Powergen plc successfully completed the merger transaction involving the two companies. 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 $2.2 billion of LG&E Energy's debt. Pursuant to the acquisition agreement, LG&E Energy became a wholly owned subsidiary of Powergen and, as a result, LG&E became an indirect subsidiary of Powergen. LG&E will continue its separate identity and serve customers in Kentucky under its existing name. The preferred stock and debt securities of LG&E were not affected by this transaction and LG&E will continue to file SEC reports. Following the merger, Powergen became a registered holding company under PUHCA, and LG&E, as a subsidiary of a registered holding company, became subject to additional regulations under PUHCA.
LG&E Energy and KU Energy merged on May 4, 1998, with LG&E Energy as the surviving corporation. As a result of the merger, the LG&E Energy, which is the parent of LG&E, became the parent company of Kentucky Utilities Company (KU).
LGKU. The operating utility subsidiaries (LG&E and KUKU) have continued to maintain their separate corporate identities and serve customers in Kentucky and Virginia under their present names. LG&E Energy has estimated approximately $760 million in gross non-fuel savings over a ten-year period following the merger. Costs to achieve these savings for the CompanyLG&E of $50.2 million were recorded in the second quarter of 1998, $18.1 million of which were initially deferred and are being amortized over a five-year period pursuant to regulatory orders. Primary components of the merger costs were separation benefits, relocation costs, and transaction fees, the majority of which were paid by December 31, 1998. The CompanyLG&E expensed the remaining costs associated with the merger ($32.1 million) in the second quarter of 1998. In regulatory filings associated with approval of the merger, the CompanyLG&E committed not to seek increases in existing base rates and proposed reductions in their retail customers' bills in amounts based on one-half of the savings, net of the deferred and amortized amount, over a five-year period. The common stock,
preferred stock and debt securities of the CompanyLG&E were not affected by the merger.

Regulatory and administrative approvals were obtained from the Federal Energy
Regulatory Commission, (FERC), the Federal Trade Commission, the Securities
and Exchange Commission, the Public Service Commission of Kentucky (Kentucky
Commission or Commission), the Virginia State Corporation Commission and the
stockholders of LG&E Energy and KU Energy prior to the effective date of the
merger. LG&E Energy, as the parent of LG&E and KU, continues to be an exempt
holding company under the Public Utility Holding Company Act of 1935.
Management has accounted for the LG&E Energy—KU Energy merger as a pooling of interests and as a tax-free reorganization under the Internal Revenue Code.

In
As part of its LG&E Energy—KU Energy merger order, the application filed with theKentucky Commission the utilities proposed thatapproved a surcredit whereby 50% of the net non-fuel cost savings estimated to be achieved from the merger, less $18.1 million or 50% of the originally estimated costs to achieve such savings, by the Company, be applied to reduce customer rates through a surcredit on customers' bills and the remaining 50% be retained by the companies. The Commission approved the surcredit andis allocated the customer
savings 53% to KU and 47% to LG&E.&E pursuant to Kentucky Commission order. The surcredit will be about 2% of customer bills over the next five yearsthrough mid 2003 and will amount to approximately $55 million in net non-fuel savings to the Company's customers.LG&E. Any fuel cost savings are passed to Kentucky customers through the Company'scompanies' fuel adjustment clause.

NOTEclauses. See Note 3 - RATES AND REGULATORY MATTERS

The Companyfor more information about LG&E's rates and regulatory matters.
Note 3—Rates and Regulatory Matters
Accounting for the regulated utility business conforms with generally accepted accounting principles as applied to regulated public utilities and as prescribed by FERC and the Kentucky
22
Commission. The CompanyLG&E is subject to Statement of Financial Accounting
Standards No. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION
(SFAS No. 71). Under SFAS No. 71,Accounting for the Effects of Certain Types of Regulation, under which certain costs that would otherwise be charged to expense are deferred as regulatory assets based on expected recovery from customers in future rates. Likewise, certain credits that would otherwise be reflected as income are deferred as regulatory liabilities based on expected flowbackreturn to customers in future rates. The Company'sLG&E's current or expected recovery of deferred costs and expected flowbackreturn of deferred credits is generally based on specific ratemaking decisions or precedent for 9
each item. The following regulatory assets and liabilities were included in theLG&E's balance sheets as of December 31 (in thousands of $):

1998 1997
---------- ---------

Unamortized loss on bonds ............... $ 17,627 $ 18,698
Merger costs ............................ 16,332 2,938
Manufactured gas sites .................. 3,684 3,263
-----------------------
Total regulatory assets ................. 37,643 24,899

Deferred income taxes - net ............. (63,529) (65,502)
-----------------------

Regulatory assets and (liabilities) - net $(25,886) $(40,603)
-----------------------
-----------------------

During 1997,
2000 1999
Unamortized loss on bonds $ 19,036 $ 16,556
Merger costs 9,073 12,702
Manufactured gas sites 2,368 2,185
One utility costs 6,331 —
Total regulatory assets 36,808 31,443
Deferred income taxes—net (54,593 ) (56,767 )
Deferred net gain (559 ) (1,959 )
Total regulatory liabilities (55,152 ) (58,726 )
Regulatory liabilities—net $ (18,344 ) $ (27,283 )
PUHCA. Following the Company wrote offmerger transaction involving LG&E Energy and Powergen, Powergen became a registered holding company under PUHCA. As a result, Powergen, its utility subsidiaries, including LG&E, and certain previously deferred assetsof its non-utility subsidiaries are subject to extensive regulation by the SEC under PUHCA with respect to issuances and sales of securities, acquisitions and sales of certain utility properties, and intra-system sales of certain goods and services. In addition, PUHCA generally limits the ability of registered holding companies to acquire additional public utility systems and to acquire and retain businesses unrelated to the utility operations of the holding company. Powergen believes that amountedit has adequate authority (including financing authority) under existing SEC orders and regulations for it and its subsidiaries to approximately $4.2 million. Items written off include expenses
associated with the Company's hydro-electric plant,conduct their businesses as proposed during 2001. Powergen will seek additional authorization when necessary.
Environmental Cost Recovery. In August 1999, a management audit fee,
and the accelerated write-offfinal order of losses on early retirement of facilities.

ENVIRONMENTAL COST RECOVERY. Since May 1995, the Company implemented an
environmental cost recovery (ECR) surcharge to recover certain environmental
compliance costs, including costs to comply with the 1990 Clean Air Act, as
amended, as well as other environmental regulations, including those
applicable to coal combustion wastes and related by-products. The ECR
mechanism was authorized by state statute in 1992 and was first approved by the Kentucky Commission in a KU case in July 1994.

The Commission's order approvingapproved LG&E's settlement agreement concerning the surcharge in the KU case and the
constitutionalityrefund of the surcharge was challenged by certain intervenors,
including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions
of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December
1997, respectively, have upheld the constitutionality of the ECR statute but
differed on a claim of retroactive recovery of certain amounts. The Commission
ordered that certain surcharge revenues collected by the Company be subject to
refund pending final determination of all appeals.

On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding
the constitutionality of the surcharge statute. The decision, however, reversed
the ruling of the Court of Appeals on the retroactivity claim, thereby denying recovery of costs associated with pre-1993 environmental projects. LG&E began applying the refund to customers' bills in October 1999, and completed the refund process in the month of November 2000. All aspects of the original litigation of this issue have now been resolved.
In March 2000, LG&E filed an application with the Kentucky Commission to obtain a CCN to construct up to three SCRs NOx reduction facilities. The construction and subsequent operation of the SCRs is intended to reduce NOx emission levels to meet the EPA's mandated NOx emission level of 0.15 lbs./ Mmbtu by May 2003. Following a period of discovery in the proceeding, the Kentucky Commission granted LG&E's request for a CCN in June 2000. In its order, the Kentucky Commission ruled that LG&E's proposed plan for construction was "reasonable, cost-effective and will not result in the wasteful duplication of facilities." In October 2000, LG&E filed an application with the Kentucky Commission to amend its Environmental Compliance Plan to reflect the addition of the proposed NOx reduction technology projects throughand to amend its Environmental Cost Recovery Tariff to include an overall rate of return on capital investments. Approval of LG&E's application will allow LG&E to
23
begin to recover the ECR.costs associated with these new projects, subject to Kentucky Commission oversight during normal six-month and two-year reviews. Following the completion of hearings in March 2001, a ruling is expected by May 2001.
Electric PBR/ESM. In October 1998, LG&E filed an application with the Kentucky Commission for approval of a new method of determining electric rates that sought to provide financial incentives for LG&E to further reduce customers' rates. The court remanded the casefiling was made pursuant to the September 1997 Kentucky Commission order approving the merger of LG&E Energy and KU Energy, wherein the Kentucky Commission directed LG&E to determineindicate whether they desired to remain under traditional rate of return regulation or commence non-traditional regulation. The proposed ratemaking method, known as PBR, included financial incentives for LG&E to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the proper
adjustmentsPBR proposal provided for financial penalties and rewards to refund amounts collectedassure continued high quality service and reliability.
In April 1999, LG&E filed a joint agreement with KU and the Kentucky Attorney General to adopt the PBR plan subject to certain amendments. The Kentucky Commission issued initial orders implementing the amended PBR plan, effective July 1999, and subject to modification. The Kentucky Commission also consolidated into the continuing PBR proceedings an earlier March 1999, rate complaint by a group of industrial intervenors, KIUC, in which KIUC requested significant reductions in electric rates. Hearings were conducted before the Kentucky Commission on LG&E's amended PBR plan and the KIUC rate reduction petitions in August and September 1999.
In January 2000, the Kentucky Commission issued orders for such pre-1993 environmental
projects.LG&E in the subject cases, ruling that LG&E should reduce base rates by $27.2 million effective with bills rendered beginning March 1, 2000. The partiesKentucky Commission eliminated LG&E's proposal to operate under its PBR plan and reinstated the FAC mechanism effective March 1, 2000. The Kentucky Commission offered LG&E the opportunity to operate under an ESM for the next three years. Under this mechanism, incremental annual earnings resulting in a rate of return on equity either above or below a range of 10.5% to 12.5% would be shared 60% with shareholders and 40% with ratepayers.
Later in January 2000, LG&E filed motions for correction to the proceeding have notifiedJanuary 2000 orders for computational and other errors made in the Commission that they
have reached agreement asKentucky Commission's orders which produced overstatements in the base rate reductions to LG&E of $1.1 million. In February 2000, LG&E accepted the terms, refund amounts, refund procedureKentucky Commission's proposed ESM and forward applicationfiled an ESM tariff which contained detailed provisions for operation of the ECR. The settlement agreement is subject toESM rates. In June 2000, the Kentucky Commission approval. The Company recorded a provision for rate refund of $4.5
million in December 1998.

DEMAND SIDE MANAGEMENT. In January 1994, the Company implemented a
Commission-approved demand side management (DSM) programruled that the Company,final rate reduction should be $26.3 million, a change of approximately $900,000 and ordered LG&E to implement the Jefferson County Attorney, and representativesrevised rates effective with service rendered beginning June 1, 2000. LG&E reinstated its FAC beginning with March 2000 billings.
The first ESM filing was made on March 1, 2001, for year ended December 31, 2000. By order of several customer
interest groups had filed with the Commission.Kentucky Commission rate changes prompted by the ESM filing go into effect in April of each year. At December 31, 2000, LG&E recorded in its financial statements an estimated refund to ratepayers of $2.5 million.
DSM. LG&E's rates contain a DSM provision. The program includedprovision includes a rate mechanism that (1) provided the Companyprovides concurrent recovery of DSM costs (2)
providedand provides an incentive for implementing DSM programs and (3)programs. This program had allowed the
CompanyLG&E to recover revenues from lost sales associated with the DSM program (decoupling). In June, but in 1998, the CompanyLG&E and customer interest groups requested an end to the then current form of the decoupling rate mechanism. On June 1,In September 1998, the Company discontinued recording revenues from lost sales due to DSM. Accrued
decoupling revenues

recorded for periods prior to June 1, 1998, will continue to be collected
through the DSM recovery mechanism. On September 23, 1998, theKentucky Commission accepted the Company'sLG&E's modified tariff reflecting this proposaldiscontinuing the decoupling mechanism effective as of June 1, 1998. PERFORMANCE-BASED RATEMAKING.In September 2000, LG&E filed a plan to continue DSM programming with the Kentucky Commission.
24
This filing calls for the expansion of the DSM programs into the service territory served by KU and proposes a mechanism to recover revenues from lost sales associated with DSM programs based on program planning engineering estimates and post-implementation evaluation.
Gas PBR. Since October 1997, the CompanyLG&E has implemented a
Commission-approved,an experimental performance-based ratemaking mechanism related to gas procurement activities and off-system gas sales.sales only. During the three-year test period beginning October 1997, rate adjustments related to this mechanism will be determined for each 12-month period beginning November 1 and ending October 31. DuringSince its implementation on November 1, 1997, through October 31, 2000, LG&E has achieved $19.6 million in savings. Of the first yeartotal savings, LG&E has retained $8.9 million, and the remaining portion of $10.7 million has been shared with customers. In December 2000, LG&E filed an Application reporting on the operation of the mechanism ended October 31, 1998,experimental PBR and requested the Company recorded $3.6 millionKentucky Commission to extend the PBR for an additional five years as a result of the benefits provided to both LG&E and its sharecustomers during the preceding three year experimental period. A ruling is expected by the summer of reduced gas costs. The $3.6
million will be billed2001.
FAC. Prior to customers throughimplementation of the gas supply clause beginning
February 1, 1999.

FUEL ADJUSTMENT CLAUSE. The Company has a fuel adjustment clause (FAC)PBR in July 1999, and following its termination in March 2000, LG&E employed an FAC mechanism, which under Kentucky law allows the Companyallowed LG&E to recover from customers, the actual fuel costs associated with retail electric sales. As ofIn February 12, 1999, the CompanyLG&E received orders from the Kentucky Commission requiring a refund to retail electric customers of approximately $3.9 million resulting from reviews of the FAC from November 1994, through April 1998.1998, of which $1.9 million was refunded in April 1999, for the period beginning November 1994, and ending October 1996. The orders changed the Company'sLG&E's method of assigningcomputing fuel costs associated with electric line losses on off-systemwholesale sales appropriate for recovery through the FAC. The orders require
these amountsFollowing rehearing in December 1999, the Kentucky Commission agreed with LG&E's position on the appropriate loss factor to be refunded to customers during the first quarter of 1999 and
to includeuse in the FAC calculationcomputation and issued an order reducing the costrefund level for the 18-month period under review to approximately $800,000. LG&E enacted the refund with billings in the month of fuel associatedJanuary 2000. LG&E and KIUC each filed separate appeals from the Kentucky Commission's February 1999 orders with line losses
incurredthe Franklin County, Kentucky Circuit Court and in making off-system sales.May 2000, the Court affirmed the Kentucky Commission's orders regarding the amounts disallowed and ordered the case remanded as to the Kentucky Commission's denial of interest, directing the Kentucky Commission to determine whether interest should be awarded to LG&E's ratepayers. In June 2000, LG&E appealed the Circuit Court's decision to the Kentucky Court of Appeals. A final decision on the appeal is not expected until late 2001 or early 2002.
Gas Rate Case. In March 2000, LG&E filed an application with the Kentucky Commission requesting an adjustment in LG&E's gas rates. LG&E asked for a general adjustment in gas rates for a test year for the twelve months ended December 31, 1999. The revenue increase applied for was $26.4 million. The Kentucky Commission has not issuedsubsequently suspended the Companyeffective date of the proposed new tariffs, and held hearings during August 2000. In September 2000, the Kentucky Commission granted LG&E an orderannual increase in its base gas revenues of $20.2 million effective September 28, 2000. The Kentucky Commission authorized a return on equity of 11.25%. The Kentucky Commission approved LG&E's proposal for a weather normalization billing adjustment mechanism that will normalize the review
period May 1998 througheffect of weather on revenues from gas sales. In October 1998, however, following2000, the methods set forth
inKentucky Attorney General requested that the previous orders, the Company estimates up to an additional $1.3 million
could be refundable to retail electric customers for open review periods through
December 1998. Management does not believe final resolutionKentucky Commission grant rehearing on a single revenue requirements issue (normalization of these proceedings
will have a material adverse effectforfeited discounts) on the Company's financial positiongrounds that the September order did not rule on or results of operations.

Theotherwise discuss the issue. In November 2000, the Kentucky Commission granted the Company's motionAttorney General's request for rehearing, rejected the Attorney General's proposed adjustment to suspendnormalize the refund
obligation until further direction by the Commission. The Commission advisedlevel of forfeited discounts, and ordered that the Company may haveits September 2000 order be modified to pay interestreflect its findings on the refund amounts during the
suspension period. The Company is awaiting aissue.
25
Kentucky Commission response to a motion to
revoke the orders, or in the alternative, grant a rehearing.

FUTURE RATE REGULATION. In October 1998, LG&E and KU filed separate, but
parallel applications with the CommissionAdministrative Case for approval of a new method of
determining electric rates that provides financial incentives for LG&E and KU to
further reduce customers' rates. The filing was made pursuant to the September
1997 Commission order approving the merger of LG&E Energy and KU Energy, wherein
the Commission directed LG&E and KU to indicate whether they desired to remain
under traditional rate of return regulation or commence non-traditional
regulation. The new ratemaking method, known as performance-based ratemaking
(PBR), would include financial incentives for LG&E and KU to reduce fuel costs
and increase generating efficiency, and to share any resulting savings with
customers. Additionally, the PBR provides financial penalties and rewards to
assure continued high quality service and reliability.

The PBR plan proposed by LG&E and KU consists of five components:

- The utilities' fuel adjustment clause mechanism will be withdrawn
and replaced with a cap that limits recovery of actual changes in
fuel cost to changes in a fuel price index for a five-state
region. If the utilities outperform the index, benefits will be
shared equally between shareholders and customers. If the
utilities' fuel costs exceed the index, the difference will be
absorbed by LG&E Energy's shareholders.

- Customers will continue to receive the benefits from the
post-merger joint dispatch of power from LG&E's and KU's
generating plants.

- Power plant performance will be measured against the best
performance achieved between 1991 and 1997. If the performance
exceeds this level, customers will share in up to $10 million
annually of benefits from this performance at each of LG&E and KU.

- The utilities will be encouraged to maintain and improve service
quality, reliability, customer satisfaction and safety, which will
be measured against six objective benchmarks. The plan provides
for annual rewards or penalties to the Company of up to $5 million
per year at each of LG&E and KU.

- The plan provides the utilities with greater flexibility to
customize rates and services to meet customer needs. Services will
continue to be priced above marginal cost and customers will
continue to have the option to elect standard tariff service.

These proposals are subject to approval by the Commission. Approval proceedings
commenced in October 1998 and a final decision likely will occur in 1999.
Several intervenors are participating in the case. Some have requested that the
Commission reduce base rates before implementing PBR. The Company is not able to
predict the ultimate outcome of these proceedings, however, should the
Commission mandate significant rate reductions at the Company, through the PBR
proposal or otherwise, such actions could have a material effect on the
Company's financial condition and results of operations.

KENTUCKY PSC ADMINISTRATIVE CASE FOR AFFILIATE TRANSACTIONS.Affiliate Transactions. In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Kentucky Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility operations and affiliates. The Kentucky Commission intends to address two major areas in the proceedings: the tools and conditions needed to prevent cost shifting and cross-subsidization between regulated and non-utility operations; and whether a code of conduct should be established to assure that non-utility segments of the holding company are not engaged in practices whichthat could result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Kentucky Commission issued a draft code of conduct and cost allocation guidelines. In January 1999, the Company,LG&E, as well as all parties to the proceeding, filed comments on the Kentucky Commission draft proposals. Initial hearings
are scheduledIn December 1999, the Kentucky Commission issued guidelines on cost allocation and held a hearing in January 2000, on the draft code of conduct. In February 2000, the Kentucky Commission issued including a draft Code of Conduct for the first quarterpurpose of 1999. Management does not expectfurther consideration in the ultimate resolutionprocess to promulgate a regulation. In early 2000, the Kentucky General Assembly enacted legislation, House Bill 897, which authorized the Kentucky Commission to require utilities who provide nonregulated activities to keep separate accounts and allocate costs in accordance with procedures established by the Kentucky Commission. On February 14, 2001, the Kentucky Commission published notice of this mattertheir intent to havepromulgate new administrative regulations. In the same Bill, the General Assembly set forth provisions to govern a material adverse effect on the
Company's financial position or results of operations.

NOTE 4 - FINANCIAL INSTRUMENTS

At December 31, 1998, the Company held U.S. Treasury note and bond futures
contracts with notional amounts totaling $2.8 million. These contracts are used
to hedge price risk associated with certain marketable securities and mature in
March 1999.

As of December 31, 1998, the Company had in effect six interest-rate swap
agreements to hedge its exposure to tax exempt ratesutilities activities related to Pollution
Control Bonds, Variable Rate Series. The swaps have notional amounts totaling
$166 millionthe sharing of information, databases, and mature at various times from 1999 to 2005. The Company pays a
weighted-average fixed rate onresources between its employees or an affiliate involved in the swaps of 3.89% and receives a variable rate
based on the JJ Kenny Index (in the case of one of the swaps)marketing or the Bond Market
Association Municipal Swap Index.provision of nonregulated activities and its employees or an affiliate involved in the provision of regulated services. The indices averaged 3.48%legislation became law in 1998.

In April 1998, the Company entered into a forward-starting interest-rate swap
with a notional amount of $83.3 million. The swap will hedge anticipated
variable-rate borrowing commitments. It will start in AugustJuly 2000 and mature in
November 2020. LG&E will pay a fixed rate of 5.21% and receive a variable rate
based on the Bond Market Association Municipal Swap Index. Under certain
conditions, the counterparty to the agreement may terminate the swap at no cost
after August 2010.has been operating pursuant thereto since that time.
Note 4—Financial Instruments
The cost and estimated fair values of the Company'sLG&E's non-trading financial instruments as of December 31, 19982000 and 19971999 follow (in thousands of $):
1998 1997
--------------------- ---------------------
FAIR FAIR
COST VALUE COST VALUE
---- ----- ---- -----

Marketable securities ........................... $ 17,767 $ 17,851 $ 19,213 $ 19,311
Long-term investments -
Not practicable to estimate fair value ....... 748 748 747 747
Preferred stock subject to mandatory redemption . 25,000 26,413 25,000 26,250
Long-term debt .................................. 626,800 648,603 626,800 649,491
U.S. Treasury note and bond futures ............. -- (50) -- (37)
Interest-rate swaps ............................. -- (7,378) -- (248)

2000 1999
Cost Fair
Value Cost Fair
Value
Marketable securities $ 4,403 $ 4,056 $ 7,253 $ 6,936
Long-term investments—
Not practicable to estimate fair value 564 564 746 746
Preferred stock subject to mandatory redemption 25,000 25,275 25,000 24,861
Long-term debt (including current portion) 606,800 606,236 626,800 623,498
U.S. Treasury note and bond futures — — — 81
Interest-rate swaps — (5,998 ) — 1,666
All of the above valuations reflect prices quoted by exchanges except for the swaps and the long-term investments. The fair values of the swaps reflect price quotes from dealers or amounts calculated using accepted pricing models. The fair values of the long-term investments reflect cost, since the CompanyLG&E cannot reasonably estimate fair value.

NOTE 5 - CONCENTRATIONS OF CREDIT AND OTHER RISK
26
Interest Rate Swaps. LG&E enters into interest rate swap agreements to exchange variable interest rate payment obligations without the exchange of underlying principal amounts. As of December 31, 2000, and 1999, LG&E was party to various interest rate swaps with aggregate notional amounts of $234.3 million in each year. Under swap agreements LG&E paid fixed rates averaging 4.40% and 3.80% and received variable rates averaging 4.84% and 5.46% at December 31, 2000, and 1999, respectively. The swaps mature on dates ranging from 2001 to 2020.
At December 31, 2000, LG&E held U.S. Treasury note and bond futures contracts with notional amounts totaling $6.1 million. These contracts are used to hedge price risk associated with certain marketable securities and mature in March 2001.
Note 5—Concentrations of Credit and Other Risk
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on- or off-balance sheet) relate to groups of customers or counterparties that have similar economic or industry characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.

The Company's
LG&E's customer receivables and gas and electric revenues arise from deliveries of natural gas to approximately 289,000299,000 customers and electricity to approximately 360,000364,000 customers in Louisville and adjacent areas in Kentucky. For the year ended December 31, 1998, 77%2000, 72% of total revenue was derived from electric operations and 23%28% from gas operations.

The Company's operation
In December 1998, LG&E and maintenance employees are members of the
International Brotherhood of Electrical Workers (IBEW)IBEW Local 2100 employees, which representsrepresent approximately 60% of the Company's workforce. On December 10, 1998,
the Company and IBEW employeesLG&E's workforce, entered into a three-year collective bargaining agreement following a vote by IBEW members which ratified the contract providing
for certain wage and benefit improvements, and opportunities for early
retirement.

NOTE 6 - MARKETABLE SECURITIES

The Company'sagreement.
Note 6—Marketable Securities
In 2000, LG&E classified marketable securities haveas "trading securities" under the provisions of SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities. Prior to that, LG&E's marketable securities had been determined to be "available-for-sale" under"available-for-sale." All unrealized holding gains and losses were immediately recognized in earnings on the provisionsdate of Statementtransfer. Proceeds from sales of Financial Accounting
Standards SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES.trading securities in 2000 were approximately $4.1 million. Proceeds from sales of available-for-sale securities in 19981999 were approximately $18.8 million, which$11.7 million. The sales for both years resulted in immaterial realized gains and
losses. Proceeds from sales of available-for-sale securities in 1997 were
approximately $2.5 million, which resulted in immaterialnet realized gains and losses, calculated using the specific identification method.
27
Approximate cost, fair value, and other required information pertaining to the
Company's available-for-saleLG&E's securities by major security type, as of December 31, 19982000 and 1997,1999, follow (in thousands of $):
1998 1997
-------------------------------- --------------------------------
FIXED FIXED
EQUITY INCOME TOTAL EQUITY INCOME TOTAL
------ ------ ----- ------ ------ -----

Cost ................................. $ 3,798 $ 13,969 $ 17,767 $ 3,763 $ 15,450 $ 19,213
Unrealized gains ..................... 276 31 307 192 13 205
Unrealized losses .................... (95) (128) (223) (40) (67) (107)
---------------------------------------------------------------------
Fair values .......................... $ 3,979 $ 13,872 $ 17,851 $ 3,915 $ 15,396 $ 19,311
---------------------------------------------------------------------
---------------------------------------------------------------------

Fair Values:
No maturity ....................... $ 3,979 $ 178 $ 4,157 $ 3,915 $ 114 $ 4,029
Contractual maturities:
Less than one year .............. -- 8,301 8,301 -- 8,795 8,795
One to five years ............... -- 3,861 3,861 -- 5,442 5,442
Five to ten years ............... -- -- -- -- -- --
Over ten years .................. -- 1,532 1,532 -- 1,045 1,045
Not due at a single maturity date -- -- -- -- -- --
---------------------------------------------------------------------
Total Fair Values .................... $ 3,979 $ 13,872 $ 17,851 $ 3,915 $ 15,396 $ 19,311
---------------------------------------------------------------------
---------------------------------------------------------------------

NOTE 7 - PENSION PLANS AND RETIREMENT BENEFITS
The Company
Equity Fixed
Income Total
2000:
Cost $ 4,403 $ — $ 4,403
Realized losses (347 ) — (347 )
Fair values $ 4,056 $ — $ 4,056
Fair values:
No maturity $ 4,056 $ — $ 4,056
Total fair values $ 4,056 $ — $ 4,056
1999:
Cost $ 4,385 $ 2,868 $ 7,253
Unrealized gains 90 3 93
Unrealized losses (304 ) (106 ) (410 )
Fair values $ 4,171 $ 2,765 $ 6,936
Fair values:
No maturity $ 4,171 $ — $ 4,171
Contractual maturities:
Less than one year — 2,134 2,134
One to five years — 631 631
Total fair values $ 4,171 $ 2,765 $ 6,936
Note 7—Pension Plans and Retirement Benefits
Pension Plans. LG&E sponsors several qualified and non-qualified pension plans and other postretirement benefit plans for its employees. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the three-year period ending
28
December 31, 19982000, and a statement of the funded status as of December 31 for each of the last three years (in thousands of $):
PENSION PLANS OTHER BENEFITS
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----

Change in benefit obligations:
Benefit obligation at beginning of year $ 274,095 $ 229,349 $ 206,866 $ 43,373 $ 39,951 $ 37,815
Service cost ........................... 6,333 5,214 4,989 761 746 773
Interest cost .......................... 19,873 17,629 16,697 2,946 2,942 2,976
Plan amendments ........................ 3,724 3,085 18,694 599 -- 4,066
Curtailment (gain) or loss ............. (2,218) -- -- 344 -- --
Special termination benefits ........... 18,295 -- -- 2,855 -- --
Benefits paid .......................... (10,866) (8,735) (7,745) (2,634) (2,604) (2,678)
Actuarial (gain) or loss ............... 2,699 27,553 (10,152) (3,280) 2,338 (3,001)
---------------------------------------------------------------------------
Benefit obligation at end of year ...... $ 311,935 $ 274,095 $ 229,349 $ 44,964 $ 43,373 $ 39,951
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Change in plan assets:
Fair value of plan assets at beginning
of year ................................ $ 280,238 $ 238,026 $ 207,471 $ 4,384 $ 2,284 $ --
Actual return on plan assets ........... 38,913 46,078 31,921 199 80 --
Employer contributions ................. 375 4,869 6,379 3,207 3,696 2,284
Benefits paid .......................... (10,866) (8,735) (7,745) (1,728) (1,676) --
---------------------------------------------------------------------------
Fair value of plan assets at end of year $ 308,660 $ 280,238 $ 238,026 $ 6,062 $ 4,384 $ 2,284
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Reconciliation of funded status:
Funded status .......................... $ (3,275) $ 6,143 $ 8,677 $ (38,902) $ (38,989) $ (37,667)
Unrecognized actuarial (gain) or loss .. (72,037) (61,720) (65,850) (285) 2,901 493
Unrecognized transition (asset) or
obligation ............................. (8,076) (9,188) (10,300) 18,080 20,053 21,390
Unrecognized prior service costs ....... 41,447 43,518 44,141 3,519 3,410 3,738
---------------------------------------------------------------------------
Net amount recognized at end of year ... $ (41,941) $ (21,247) $ (23,332) $ (17,588) $ (12,625) $ (12,046)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2000 1999 1998
Pension Plans:
Change in benefit obligation
Benefit obligation at beginning of year $ 283,267 $ 311,935 $ 274,095
Service cost 3,408 5,005 6,333
Interest cost 22,698 21,014 19,873
Plan amendments 17,042 (2,397 ) 3,724
Curtailment (gain) or loss — — (2,218 )
Special termination benefits — — 18,295
Benefits paid (16,656 ) (15,471 ) (10,866 )
Actuarial (gain) or loss and other 1,063 (36,819 ) 2,699
Benefit obligation at end of year $ 310,822 $ 283,267 $ 311,935
Change in plan assets
Fair value of plan assets at beginning of year $ 360,095 $ 308,660 $ 280,238
Actual return on plan assets (6,150 ) 51,995 38,913
Employer contributions and plan transfers (1,804 ) 16,142 375
Benefits paid (16,656 ) (15,471 ) (10,866 )
Administrative expenses (2,107 ) (1,231 ) —
Fair value of plan assets at end of year $ 333,378 $ 360,095 $ 308,660
Reconciliation of funded status
Funded status $ 22,556 $ 76,828 $ (3,275 )
Unrecognized actuarial (gain) or loss (74,086 ) (126,554 ) (72,037 )
Unrecognized transition (asset) or obligation (5,853 ) (6,965 ) (8,076 )
Unrecognized prior service cost 47,984 35,588 41,447
Net amount recognized at end of year $ (9,399 ) $ (21,103 ) $ (41,941 )
29
2000 1999 1998
Other Benefits:
Change in benefit obligation
Benefit obligation at beginning of year $ 44,997 $ 44,964 $ 43,373
Service cost 822 1,205 761
Interest cost 4,225 3,270 2,946
Plan amendments 5,826 2,377 599
Curtailment (gain) or loss — — 344
Special termination benefits — — 2,855
Benefits paid (4,889 ) (3,050 ) (2,634 )
Actuarial (gain) or loss 6,000 (3,769 ) (3,280 )
Benefit obligation at end of year $ 56,981 $ 44,997 $ 44,964
Change in plan assets
Fair value of plan assets at beginning of year $ 10,526 $ 6,062 $ 4,384
Actual return on plan assets (92 ) 1,776 199
Employer contributions 1,621 4,681 3,207
Benefits paid (4,889 ) (1,993 ) (1,728 )
Fair value of plan assets at end of year $ 7,166 $ 10,526 $ 6,062
Reconciliation of funded status
Funded status $ (49,815 ) $ (34,471 ) $ (38,902 )
Unrecognized actuarial (gain) or loss 5,623 (1,638 ) (285 )
Unrecognized transition (asset) or obligation 13,374 14,489 18,080
Unrecognized prior service cost 8,960 4,292 3,519
Net amount recognized at end of year $ (21,858 ) $ (17,328 ) $ (17,588 )
There are no plan assets in the nonqualified plan due to the nature of the plan.
The following tables provide the amounts recognized in the statement of
financial positionbalance sheet and information for plans with benefit obligations in excess of plan assets as of December 31, 1998, 19972000, 1999 and 19961998 (in thousands of $):
PENSION PLANS OTHER BENEFITS
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----

Amounts recognized in balance sheet consist of :
Accrued benefit liability ...................... $(41,977) $(21,317) $(23,372) $(17,588) $(12,625) $(12,046)
Intangible asset ............................... 36 70 40 -- -- --
-------------------------------------------------------------------------
Net amount recognized at end of year ........... $(41,941) $(21,247) $(23,332) $(17,588) $(12,625) $(12,046)
--------------------------------------------------------------------------
--------------------------------------------------------------------------

PENSION PLANS OTHER BENEFITS
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----

Additional year-end information for plans with
benefit obligations in excess of plan assets:
Projected benefit obligation (1) ............ $148,005 $121,902 $101,260 $ 44,964 $ 43,373 $ 39,951
Accumulated benefit obligation (2) .......... 131,430 4,179 3,634 -- -- --
Fair value of plan assets (1) ............... 107,988 99,151 81,848 6,062 4,384 2,284
2000 1999 1998
Pension Plans:
Amounts recognized in the balance sheet consisted of:
Prepaid benefits cost $ 18,880 $ 6,466 $ —
Accrued benefit liability (28,279 ) (27,569 ) (41,977 )
Intangible asset — — 36
Net amount recognized at year-end $ (9,399 ) $ (21,103 ) $ (41,941 )
Additional year-end information for plans with accumulated benefit obligations in excess of plan assets (1):
Projected benefit obligation $ 4,088 $ 4,845 $ 148,005
Accumulated benefit obligation 3,501 4,327 131,430
Fair value of plan assets — — 107,988
(1) All years include the Company's non-union plan and unfunded Supplemental
Executive Retirement Plans (SERPs).

(2)
1998 includes the Company's non-union plan and SERPs. 19972000 and 19961999 include SERPs only.
30
2000 1999 1998
Other Benefits:
Amounts recognized in the balance sheet consisted of:
Accrued benefit liability $ (21,858 ) $ (17,328 ) $ (17,588 )
Additional year-end information for plans with benefit obligations in excess of plan assets:
Projected benefit obligation $ 56,981 $ 44,997 $ 44,964
Fair value of plan assets 7,166 10,526 6,062
The following table provides the components of net periodic benefit cost for the plans for 1998, 19972000, 1999 and 19961998 (in thousands of $):
PENSION PLANS OTHER BENEFITS
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----

Components of net periodic benefit cost:
Service cost ................................ $ 6,333 $ 5,214 $ 4,989 $ 761 $ 746 $ 773
Interest cost ............................... 19,873 17,629 16,697 2,946 2,942 2,976
Expected return on plan assets .............. (23,701) (19,849) (17,706) (296) (151) --
Amortization of prior service cost .......... 3,882 3,708 3,491 367 328 328
Amortization of transition (asset) or
obligation .................................. (1,112) (1,112) (1,112) 1,315 1,337 1,337
Recognized actuarial (gain) or loss.......... (2,248) (2,866) (2,047) -- -- --
---------------------------------------------------------------------
Net periodic benefit cost ................... $ 3,027 $ 2,724 $ 4,312 $ 5,093 $ 5,202 $ 5,414
---------------------------------------------------------------------
---------------------------------------------------------------------

FAS 88 special charges
Curtailment (gain)/loss ..................... $ (2,168) $ -- $ -- $ 1,005 $ -- $ --
Prior service cost recognized ............... 1,914 -- -- 124 -- --
Special termination benefits ................ 18,295 -- -- 2,855 -- --
---------------------------------------------------------------------
Total FAS 88 charges ........................ $ 18,041 $ -- $ -- $ 3,984 $ -- $ --
---------------------------------------------------------------------
---------------------------------------------------------------------
2000 1999 1998
Pension Plans:
Components of net periodic benefit cost
Service cost $ 3,408 $ 5,005 $ 6,333
Interest cost 22,698 21,014 19,873
Expected return on plan assets (33,025 ) (28,946 ) (23,701 )
Amortization of prior service cost 4,646 3,462 3,882
Amortization of transition (asset) or obligation (1,112 ) (1,112 ) (1,112 )
Recognized actuarial (gain) or loss (6,856 ) (2,621 ) (2,248 )
Net periodic benefit cost $ (10,241 ) $ (3,198 ) $ 3,027
Special charges
Curtailment gain $ — $ — $ (2,168 )
Prior service cost recognized — — 1,914
Special termination benefits — — 18,295
Total charges $ — $ — $ 18,041
Other Benefits:
Components of net periodic benefit cost
Service cost $ 822 $ 1,205 $ 761
Interest cost 4,225 3,270 2,946
Expected return on plan assets (683 ) (401 ) (296 )
Amortization of prior service cost 1,158 473 367
Amortization of transition (asset) or obligation 1,114 1,114 1,315
Recognized actuarial gain (485 ) (183 ) —
Net periodic benefit cost $ 6,151 $ 5,478 $ 5,093
Special charges
Curtailment loss $ — $ — $ 1,005
Prior service cost recognized — — 124
Special termination benefits — — 2,855
Total charges $ — $ — $ 3,984
On May 4, 1998, LG&E Energy and KU Energy merged, with LG&E Energy as the surviving corporation. During 1998, the Company incurredLG&E invested approximately $18 million in special termination pension benefits as a result of its early retirement program offered to eligible employees post-merger.
31
The assumptions used in the measurement of the Company'sLG&E's pension benefit obligation are shown in the following table:
1998 1997 1996
---- ---- ----

Weighted-average assumptions as of December 31:
Discount rate................................ 7.00% 7.00% 7.75%
Expected long-term rate of return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase................ 3.50%-4.00% 2.00-4.00% 2.00-4.25%
2000 1999 1998
Weighted-average assumptions as of December 31:
Discount rate 7.75 % 8.00 % 7.00 %
Expected long-term rate of return on plan assets 9.50 % 9.50 % 8.50 %
Rate of compensation increase 4.75 % 5.00 % 3.50 %-4.00%
For measurement purposes, a 7%7.00% annual increase in the per capita cost of covered health care benefits was assumed for 1999.2000. The rate was assumed to decrease each
yeargradually to 4.25%5.00% for 2005 and remain at that level thereafter.

16
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects (in thousands of $):
1% DECREASE 1% INCREASE

Effect on total of service and interest cost components for 1998 $ 122 $ 146
Effect on year-end 1998 postretirement benefit obligation ...... 1,188 1,971

THRIFT SAVINGS PLANS

The Company
1% Decrease 1% Increase
Effect on total of service and interest cost components for 2000 $ (246 ) $ 279
Effect on year-end 2000 postretirement benefit obligations (1,781 ) 2,009
Thrift Savings Plans. LG&E has a thrift savings plan under section 401(k) of the Internal Revenue Code. Under the plan, eligible employees may defer and contribute to the plan a portion of current compensation in order to provide future retirement benefits. The CompanyLG&E makes contributions to the plan by matching a portion of the employee contributions. The costs were approximately $2.7 million, $2.7 million, and $2.4 million for 2000, 1999, and 1998, and $1.8 million for each of 1997 and 1996.

NOTE 8 - INCOME TAXESrespectively.
Note 8—Income Taxes
Components of income tax expense are shown in the table below (in thousands of $):
1998 1997 1996
---- ---- ----

Included in Operating Expenses:
Current - Federal.............................................. $ 45,716 $ 57,590 $ 33,823
- State................................................ 11,895 14,593 7,685
Deferred - Federal-net.......................................... 2,276 (4,565) 19,161
- State-net............................................ 678 703 6,587
Deferred investment tax credit.................................... 55 102 409
Amortization of investment tax credit............................. (4,313) (4,342) (4,406)
-------------------------------------

Total.......................................................... 56,307 64,081 63,259
-------------------------------------

Included in Other Income and (Deductions):
Current - Federal.............................................. 660 1,484 196
- Federal-merger costs................................. (6,758) - -
- State................................................ 6 161 (96)
- State-merger costs................................... (1,737) - -
Deferred - Federal-net.......................................... (165) 292 246
- State-net............................................ (42) 75 61
-------------------------------------

Total.......................................................... (8,036) 2,012 407
-------------------------------------

Total Income Tax Expense............................................. $ 48,271 $ 66,093 $ 63,666
-------------------------------------
-------------------------------------

17
2000 1999 1998
Included in operating expenses:
Current —federal $ 32,612 $ 53,981 $ 45,716
—state 5,018 13,680 11,895
Deferred —federal—net 24,272 (4,818 ) 2,276
—state—net 6,797 (780 ) 678
Deferred investment tax credit — — 55
Amortization of investment tax credit (4,274 ) (4,289 ) (4,313 )
Total 64,425 57,774 56,307
Included in other income—net:
Current —federal (2,187 ) 217 660
—federal—merger costs — — (6,758 )
—state (568 ) (30 ) 6
—state—merger costs — — (1,737 )
Deferred —federal—net (39 ) 254 (165 )
—state—net (10 ) 65 (42 )
Total (2,804 ) 506 (8,036 )
Total income tax expense $ 61,621 $ 58,280 $ 48,271
32
Net deferred tax liabilities resulting from book-tax temporary differences are shown below (in thousands of $):
1998 1997
---- ----

Deferred Tax Liabilities:
Depreciation and other plant-related items ........ $323,869 $321,442
Other liabilities ................................. 9,644 6,702
-------------------
333,513 328,144
-------------------
Deferred Tax Assets:
Investment tax credit ............................. 28,876 30,595
Income taxes due to customers ..................... 25,447 26,357
Pension overfunding ............................... 2,099 7,265
Accrued expenses not currently deductible and other 22,502 14,076
-------------------
78,924 78,293
-------------------

Net Deferred Income Tax Liability .................... $254,589 $249,851
-------------------
-------------------
2000 1999
Deferred tax liabilities:
Depreciation and other plant-related items $ 329,836 $ 321,889
Other liabilities 22,621 5,324
352,457 327,213
Deferred tax assets:
Investment tax credit 25,444 27,145
Income taxes due to customers 22,086 22,588
Pension overfunding 5,595 2,193
Accrued liabilities not currently deductible and other 10,100 19,377
63,225 71,303
Net deferred income tax liability $ 289,232 $ 255,910
A reconciliation of differences between the statutory U.S. federal income tax rate and the Company'sLG&E's effective income tax rate follows:
1998 1997 1996
---- ---- ----

Statutory federal income tax rate ....... 35.0% 35.0% 35.0%
State income taxes net of federal benefit 5.5 5.7 5.4
Amortization of investment tax credit ... (3.4) (2.4) (2.6)
Nondeductible merger expenses ........... 2.4 -- --
Other differences-net ................... (1.3) (1.5) (.7)
-----------------------

Effective Income Tax Rate ............... 38.2% 36.8% 37.1%
-----------------------
-----------------------

NOTE 9 - OTHER INCOME AND DEDUCTIONS

2000 1999 1998
Statutory federal income tax rate 35.0 % 35.0 % 35.0 %
State income taxes, net of federal benefit 4.3 5.1 5.5
Amortization of investment tax credit (2.6 ) (2.8 ) (3.4 )
Nondeductible merger expenses — — 2.4
Other differences—net (.9 ) (1.9 ) (1.3 )
Effective income tax rate 35.8 % 35.4 % 38.2 %
Note 9—Other income and deductionsIncome—net
Other income—net, consisted of the following at December 31 (in thousands of $):
1998 1997 1996
---- ---- ----

Interest and dividend income ................ $ 4,245 $ 4,786 $ 4,096
Interest on income tax settlement ........... -- 1,446 --
Gain on sale of stock options ............... -- 1,794 --
Gains (losses) on fixed asset disposal ...... 530 77 (36)
Donations ................................... (168) (147) (150)
Income taxes and other ...................... (2,111) (3,679) (2,990)
Income tax benefit on merger costs to achieve 8,495 -- --
--------------------------------
Total other income and (deductions) ......... $ 10,991 $ 4,277 $ 920
--------------------------------
--------------------------------

NOTE 10 - FIRST MORTGAGE BONDS AND POLLUTION CONTROL BONDS
2000 1999 1998
Interest and dividend income $ 3,103 $ 4,086 $ 4,245
Gains on fixed asset disposals 1,014 2,394 530
Income taxes and other 804 (2,339 ) (2,279 )
Income tax benefit on merger costs — — 8,495
Other income—net $ 4,921 $ 4,141 $ 10,991
33
Note 10—First Mortgage Bonds and Pollution Control Bonds
Long-term debt and the current portion of long-term debt, summarized below (in thousands of $), consists primarily of first mortgage bonds and pollution control bonds. Interest rates and maturities in the table below are for the amounts outstanding at December 31, 2000.
Stated
Interest Rates Weighted
Average
Interest
Rate Maturities Principal
Amounts
Noncurrent portion Variable - 6.55% 5.49 % 2003 - 2030 $ 360,600
Current portion (pollution control bonds) Variable 4.74 % 2013 - 2027 246,200
Under the provisions for LG&E's variable-rate pollution control bonds, the bonds are subject to tender for purchase at the option of the holder and to mandatory tender for purchase upon the occurrence of certain events, causing the bonds to be classified as current portion of long-term debt. The average annualized interest rate for these bonds during 2000 was 4.74%.
LG&E's First Mortgage Bonds, 6% Series of $42.6 million is scheduled to mature in 2003. There are no scheduled maturities of Pollution Control Bonds for the five years subsequent to December 31, 2000.
In January 2000, LG&E exercised its call option on its $20 million 7.50% First Mortgage Bonds due July 1, 2002. The bonds were redeemed utilizing proceeds from issuance of commercial paper.
In May 2000, LG&E issued $25 million variable rate pollution control bonds due May 1, 2027 and exercised its call option on $25 million, 7.45%, pollution control bonds due June 15, 2015. In August 2000, LG&E issued $83 million in variable rate pollution control bonds due August 1, 2030 and exercised its call option on its $83 million, 7⁵/8%, pollution control bonds due November 1, 2020.
Annual requirements for the sinking funds of the Company'sLG&E's First Mortgage Bonds (other than the First Mortgage Bonds issued in connection with certain Pollution Control Bonds) are the amounts necessary to redeem 1% of the highest principal amount of each series of bonds at any time outstanding. Property additions (166-2/3%(166²/3% of principal amounts of bonds otherwise required to be so redeemed) have been applied in lieu of cash. It is the intent
Substantially all of the Company to apply
property additions to meet 1999 sinking

fund requirements of the First Mortgage Bonds.

The trust indenture securing the First Mortgage Bonds constitutes a directLG&E's utility plants are pledged as security for its first mortgage lien upon a substantial portion of all property owned by the Company.
Thebonds. LG&E's indenture, as supplemented, provides in substance that under certain
specified conditions, portions of retained earnings will not be available for the payment of dividends on common stock.stock, under certain specified conditions. No portion of retained earnings is presently restricted by this provision.

Pollution Control Bonds (Louisville Gas and Electric Company Projects) issued by
Jefferson and Trimble Counties, Kentucky, are secured by the assignment of loan
payments by the Company to the Counties pursuant to loan agreements, and certain
series are further secured by the delivery from time to time of an equal amount
of the Company's First Mortgage Bonds, Pollution Control Series. First Mortgage
Bonds so delivered are summarized in the Statements of Capitalization. No
principal or interest on these First Mortgage Bonds is payable unless default on
the loan agreements occurs. The interest rate reflected in the Statements of
Capitalization applies to the Pollution Control Bonds.

On June 1, 1998, the Company's First Mortgage Bonds, 6.75% Series of $20 million
matured and were retired by the Company.

In November 1997, the Company issued $35 million of Jefferson County, Kentucky
and $35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible
Rate Series, due November 1, 2027. Interest rates for these bonds were 3.09% and
3.39%, respectively,
Note 11—Notes Payable
LG&E had no outstanding commercial paper at December 31, 1998. The proceeds from these bonds were
used to redeem the2000. LG&E had outstanding 7.75% Seriescommercial paper totaling $120.1 million at an average rate of Jefferson County, Kentucky and
Trimble County, Kentucky, Pollution Control Bonds due February 1, 2019.

The Company's First Mortgage Bonds, 7.5% Series of $20 million is scheduled to
mature in 2002, and the $42.6 million, 6% Series is scheduled for maturity in
2003. There are no scheduled maturities of Pollution Control Bonds for the five
years subsequent to December 31, 1998. The Company has no cash sinking fund
requirements.

NOTE 11 - NOTES PAYABLE

The Company had no notes payable6.02% at December 31, 1998, and 1997.1999.
At December 31, 1998,2000, LG&E had $114.6 million in notes payable to LG&E Energy Corp. The note payable is due on demand and has an average percentage rate at December 31, 2000 of 6.84%. The rate is based on the Companyavailable borrowing rate as of the last day of the prior month.
At December 31, 2000, LG&E had unused lines of credit of $200 million, for which it pays commitment fees. The credit facility provides for short-term
borrowings and support of variable rate Pollution Control Bonds.commercial paper borrowings. The credit lines are scheduled to expire in 2001. Management expects to renegotiate these lines when they expire.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

CONSTRUCTION PROGRAM. The Company
34
Note 12—Commitments and Contingencies
Construction Program. LG&E had commitments in connection with its construction program aggregating approximately $8$12.6 million at December 31, 1998.2000. Construction expenditures for the years 19992001 and 20002002 are estimated to total approximately $384$413 million. OPERATING LEASE. The CompanyIncluded in 2001 is $57 million for the purchase of 53% of two CTs currently under construction. One of the CTs is being built at LG&E's Paddy Run location and the other at KU's E.W. Brown location. KU will own 47% of the two CTs. LG&E has received approval from the Kentucky Commission for the purchase of the CTs.
Operating Lease. LG&E leases office space and accounts for all of its office space leases as operating leases. Total lease expense for 1998, 1997,2000, 1999, and 1996,1998, less amounts contributed by the parent company, was $1.6$.9 million, $1.8$1.5 million, and $1.9$1.6 million, respectively. The future minimum annual lease payments under lease agreements for years subsequent to December 31, 1998,2000, are as follows (in thousands of $):
1999 .......... $ 3,055
2000 .......... 3,321
2001 .......... 3,654
2002 .......... 3,594
2003 .......... 3,507
Thereafter 5,260
-------

Total $22,391
-------
-------

ENVIRONMENTAL.
2001 $ 3,654
2002 3,594
2003 3,507
2004 3,507
2005 1,754
Total $ 16,016
In December 1999, LG&E and KU entered into an 18-year cross-border lease of its two jointly owned combustion turbines recently installed at KU's Brown facility. LG&E's obligation was defeased upon consummation of the cross-border lease. The transaction produced a pre-tax gain of approximately $1.2 million which was recorded in other income on the income statement in 2000, pursuant to a Kentucky Commission order.
Environmental. The Clean Air Act imposed stringent new SO₂ and NOx emission limits on electric generating units. LG&E previously had installed scrubbers on all of its generating units. LG&E's strategy for Phase II SO₂ reductions, which commenced January 1, 2000, is to increase scrubber removal efficiency to delay additional capital expenditures and may also include fuel switching or upgrading scrubbers. LG&E met the NOx emission requirements of the Act through installation of low-NOx burner systems. LG&E's compliance plans are subject to many factors including developments in the emission allowance and fuel markets, future regulatory and legislative initiatives, and advances in clean air control technology. LG&E will continue to monitor these developments to ensure that its environmental obligations are met in the most efficient and cost-effective manner.
In September 1998, the U.S. Environmental Protection Agency
(USEPA)EPA announced its final regulation"NOx SIP Call" rule requiring states to impose significant additional reductions in nitrogen oxide (NOx)NOx emissions by May 2003, in order to mitigate alleged ozone transport toimpacts on the Northeast. While each stateNortheast region. The Commonwealth of Kentucky is free to allocate its assigned NOx
reductions among various emissions sectors as it deems appropriate,currently in the regulation may ultimately require utilities to reduce their NOx emissions to
0.15 lb./mmBtu (million British thermal units ) - an 85% reduction from 1990
levels. Under the regulation, each state must incorporate the additional NOx
reductions inprocess of revising its State Implementation Plan (SIP)or "SIP" to require reductions in NOx emissions from coal-fired generating units to the 0.15 lb./Mmbtu level on a system-wide basis. In related proceedings in response to petitions filed by Septembervarious Northeast states, in December 1999, and affected
sources must install control measures by May 2003, unless granted extensions.
Several states, various labor and industry groups, and individual companies haveEPA issued a final rule pursuant to Section 126 of the Clean Air Act directing similar NOx reductions from a number of specifically targeted generating units including all LG&E units. Both rules were appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit. ManagementThe D.C. Circuit subsequently upheld most provisions of the NOx SIP Call rule, but extended the compliance date to May 2004. As the court has yet to issue a final ruling on the Section 126 rule, all LG&E generating units remain subject to the May 2003 compliance date under that rule. LG&E continues to monitor the status of various appeals pending in the D.C. Circuit and U.S. Supreme Court.
35
LG&E is currently unableimplementing a plan for adding significant additional NOx controls to determineits generating units. Installation of additional NOx controls will proceed on a phased basis, with installation of controls commencing in late 2000 and continuing through the outcome or exact impactfinal compliance date. LG&E estimates that it will incur total capital costs of this
matter until such time as the states identify specificapproximately $160 million to reduce its NOx emissions reductions in
their SIPs and the courts rule on the various legal challenges to the final
rule. However, if the 0.15 lb. target is ultimately imposed, the Company/Mmbtu level on a company-wide basis. In addition, LG&E will be
required to incur significant capital expenditures and increased operationadditional operating and maintenance costs for additionalin operating new NOx controls. Subject to further study and analysis, the Company estimates that it may incur
capital costs in the range of $100 million to $200 million. These costs would
generally be incurred beginning in 2000. The CompanyLG&E believes its costs in this regard to be comparable to those of similarly situated utilities with like generation assets. The CompanyLG&E anticipates that such capital and operating costs are the type of costs that are eligible for cost recovery from customers under its environmental surcharge mechanism and believes that a significant portion of such costs could be so recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of such recovery.

The Company
LG&E is also addressingmonitoring several other air quality issues. First,issues which may potentially impact coal-fired power plants, including the Company is
monitoring USEPA's implementationappeal of the D.C. Circuit's remand of the EPA's revised National Ambient Air Quality
Standards (NAAQS)air quality standards for ozone and 20
particulate matter. Until USEPA completes additional implementation steps,
including monitoringmatter, measures to implement EPA's regional haze rule, and nonattainment designations, managementEPA's December 2000 determination to regulate mercury emissions from power plants. In addition, LG&E is unable to
determine the precise impact of the revised standards. Second, the Company is
conducting modeling activities at its Cane Run Station in response to
notifications from regulatory agencies that the plant may be the source of
potential exceedances of the NAAQS for SO(2). Depending on future regulatory
determinations, the Company may be required to undertake corrective action
that could include significant capital expenditures or emissions limitations.
Third, the Company iscurrently working with local regulatory authorities to review the effectiveness of remedial measures aimed at controlling particulate matter emissions from its Mill Creek Station. The CompanyLG&E previously settled a number of property damage claims from adjacent residents and completed significant plant modificationsremedial measures as part of its ongoing capital construction program. The
Company is currently awaiting a final regulatory determination regarding
remedial measures. In management's opinion, resolution of any remaining
property damage claims from adjacent residents should not have a material
adverse impact on the financial position or results of operations of the
Company.

The Company is addressing potential liabilities for the cleanup of properties
where hazardous substances may have been released. The Company has identified
contamination at certain manufactured gas plant (MGP) sites currently
LG&E owns or formerly owned bythree properties which are the Company. The Company is negotiating with state agencies
withlocation of past MGP operations. Various contaminants are typically found at such former MGP sites and environmental remediation measures are frequently required. With respect to cleanupthe sites, LG&E has completed cleanups, obtained regulatory approval of a site owned by the Company. Inmanagement plans, or reached agreements reached in
1996 and 1998 with the current owners of two sites formerly owned by the
Company, the current owners of those sites have expressly agreedfor other parties to assume responsibility for environmental liabilities in return for an aggregate paymentcleanup. Based on currently available information, management estimates that it will incur additional costs of $400,000. Until conclusion of discussions with state agencies regarding the
site currently owned by the Company, management is unable to precisely determine
remaining liability for cleanup costs at MGP sites. However, management
estimates total cleanup costs to be $3 million. Accordingly, an accrual of $3
million$400,000 has been recorded in the accompanying financial statements.

The Company, along with other companies, has been identified by USEPA as
potentially responsible parties allegedly liable for cleanup of certain off-site
disposal facilities under the Comprehensive Environmental Response Compensation
and Liability Act. The Company has entered into final settlements for an
aggregate of $150,000 resolving liability in these matters.

NOTE 13 - JOINTLY OWNED ELECTRIC UTILITY PLANT

The Company
36
Note 13—Jointly Owned Electric Utility Plant
LG&E owns a 75% undivided interest in Trimble County Unit 1. Accounting
for1 which the 75% portion of the Unit, which theKentucky Commission has allowed to be reflected in customer rates, is similar to the Company's accounting for other
wholly owned utility plants.rates.
Of the remaining 25% of the Unit, Illinois Municipal Electric Agency (IMEA)IMEA owns a 12.12% undivided interest, and Indiana Municipal Power Agency (IMPA)IMPA owns a 12.88% undivided interest. Each company is responsible for theirits proportionate ownership share of fuel cost, operation and maintenance expenses, and incremental assets.

21
The following data represent shares of the jointly owned property:
TRIMBLE COUNTY
-----------------------------------------
LG&E IMPA IMEA TOTAL
------- ------- ------ ------

Ownership interest ...................................... 75% 12.88% 12.12% 100%
Mw capacity ............................................. 371.25 63.75 60 495

NOTE 14 - SEGMENTS OF BUSINESS AND RELATED INFORMATION
Trimble County
LG&E IMPA IMEA Total
Ownership interest 75 % 12.88 % 12.12 % 100 %
Mw capacity 371.25 63.75 60.00 495.00

(in thousands of $):
Cost $ 555,829
Accumulated depreciation 157,252
Net book value $ 398,577
Construction work in progress (included above) $ 12,704
In July 1999, following approval from the Kentucky Commission, LG&E purchased for $45.7 million a 38% interest in two 164.5 Mw natural gas turbines installed at KU's E.W. Brown facility (Units 6 and 7) from Capital Corp.
See also Note 12, Construction Program, for LG&E's purchase of two jointly owned CTs in 2001.
Note 14—Segments of Business and Related Information
Effective December 31, 1998, the CompanyLG&E adopted StatementsSFAS No. 131,Disclosure About Segments of Financial
Accounting Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. The Companyan Enterprise and Related Information. LG&E is a regulated public utility engaged in the generation,
37
transmission, distribution, and sale of electricity

1998

Operating revenues........................................ Depreciation and amortization............................. Interest income........................................... Interest expense.......................................... Merger costs to achieve................................... Income taxes.............................................. Net income................................................ Total assets.............................................. Construction expenditures.................................

1997

Operating revenues........................................ Depreciation and amortization............................. Interest income........................................... Interest expense.......................................... Income taxes.............................................. Net income................................................ Total assets.............................................. Construction expenditures.................................

1996

Operating revenues........................................ Depreciation and amortization............................. Interest income........................................... Interest expense.......................................... Income taxes.............................................. Net income................................................ Total assets.............................................. Construction expenditures.................................

and the storage, distribution, and sale of natural gas. Financial data for business segments, follow (in thousands of $): ELECTRIC GAS TOTAL ------------- ----------- ----------- $ 658,511(a) $ 191,545 $ 850,056 79,866 13,312 93,178 3,566 679 4,245 30,389 5,933 36,322 32,072 - 32,072 56,401 (94) 56,307 75,368 2,752 78,120 1,727,463 377,174 2,104,637 105,836 32,509 138,345 ELECTRIC GAS TOTAL -------- --- ----- $ 614,532 $ 231,011 $ 845,543 79,958 13,062 93,020 5,279 953 6,232 33,349 5,841 39,190 59,415 4,666 64,081 108,236 5,037 113,273 1,677,278 378,363 2,055,641 81,713 29,180 110,893 ELECTRIC GAS TOTAL -------- --- ----- $ 606,696 $ 214,419 $ 821,115 76,929 12,073 89,002 3,520 576 4,096 34,566 5,676 40,242 58,448 4,811 63,259 100,119 7,822 107,941 1,673,857 332,855 2,006,712 79,541 28,338 107,879
Electric Gas Total
2000
Operating revenues $ 710,958 (a) $ 272,489 $ 983,447
Depreciation and amortization 84,761 13,530 98,291
Interest income 2,551 552 3,103
Interest expense 35,604 7,614 43,218
Operating income taxes 57,869 6,556 64,425
Net income 100,395 10,178 110,573
Total assets 1,760,305 465,779 2,226,084
Construction expenditures 109,798 34,418 144,216

1999
Operating revenues $ 790,670 (b) $ 177,579 $ 968,249
Depreciation and amortization 83,619 13,602 97,221
Interest income 3,435 651 4,086
Interest expense 31,558 6,404 37,962
Operating income taxes 56,883 891 57,774
Net income 104,853 1,417 106,270
Total assets 1,775,498 395,954 2,171,452
Construction expenditures 160,844 33,800 194,644

1998
Operating revenues $ 658,511 (c) $ 191,545 $ 850,056
Depreciation and amortization 79,866 13,312 93,178
Interest income 3,566 679 4,245
Interest expense 30,389 5,933 36,322
Merger costs 32,072 — 32,072
Operating income taxes 56,401 (94 ) 56,307
Net income 75,368 2,752 78,120
Total assets 1,727,463 377,174 2,104,637
Construction expenditures 105,836 32,509 138,345
(a)
Net of provision for rate refund,refunds of $2.5 million.
(b)
Net of provision for rate refunds of $1.7 million.
(c)
Net of provision for rate refunds of $4.5 million.

NOTE 15 - SELECTED QUARTERLY DATA (UNAUDITED)
38
Note 15—Selected Quarterly Data (Unaudited)
Selected financial data for the four quarters of 19982000 and 19971999 are shown below. Because of seasonal fluctuations in temperature and other factors, results for quarters may fluctuate throughout the year.
QUARTERS ENDED
--------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
--------- ---------- ---------- -----------

(Thousands of $)
1998
Operating Revenues.................. $233,344 $201,389 $229,885 $185,438
Net Operating Income................ 32,326 33,629 53,420 16,148
Net Income.......................... 23,399 21 44,861 9,839
Net Income (Loss) Available for
Common Stock.................... 22,276 (1,122) 43,726 8,672

1997
Operating Revenues.................. $ 225,399 $ 180,276 $208,435 $ 231,433
Net Operating Income................ 32,895 30,422 46,562 38,307
Net Income.......................... 23,967 21,487 37,223 30,596
Net Income Available for
Common Stock.................... 22,840 20,326 36,077 29,445

23
Quarters Ended
March June September December
(Thousands of $)

2000
Operating revenues $ 249,642 $ 209,731 $ 229,640 $ 294,434
Net operating income 26,592 37,285 48,161 36,832
Net income 17,421 28,009 38,117 27,026
Net income available for common stock 16,256 26,692 36,756 25,659

1999
Operating revenues $ 226,620 $ 214,097 $ 296,395 $ 231,137
Net operating income 27,016 30,596 51,036 31,443
Net income 18,916 22,040 41,704 23,610
Net income available for common stock 17,826 20,954 40,614 22,375
Note 16—Subsequent Events
On January 9, 2001, LG&E Energy announced a voluntary workforce separation program for non-union employees. On January 18, 2001, the union members at LG&E voted to approve a similar voluntary separation package. LG&E targeted areas where reductions were necessary and employees in these targeted areas had a one-time opportunity to accept the separation package. Employees began leaving LG&E at the end of February 2001 and will continue through the end of the year. LG&E estimates that the separation program will result in a workforce reduction of approximately 700 employees.
On February 1, 2001, Roger Hale, Chairman of the Board and Chief Executive Officer announced his retirement from LG&E Energy, LG&E, and KU effective April 30, 2001. Victor A. Staffieri will replace Roger Hale as Chairman and Chief Executive Officer of LG&E Energy, LG&E, and KU.
On February 6, 2001, LG&E sold accounts receivables to a wholly-owned special purpose subsidiary. Simultaneously, the subsidiary entered into three-year accounts receivables securitization facilities with two financial institutions whereby an undivided interest in certain receivables are sold, on a revolving basis, for up to $75 million, at a cost of funds linked to commercial paper rates. Under the program LG&E pays fees for administrative and credit support services.
39

Louisville Gas and Electric Company
REPORT OF MANAGEMENT
The management of Louisville Gas and Electric Company is responsible for the preparation and integrity of the financial statements and related information included in this Annual Report. These statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis and, necessarily, include amounts that reflect the best estimates and judgment of management.

The Company's
LG&E's financial statements have been audited by Arthur Andersen LLP, independent public accountants. Management has made available to Arthur Andersen LLP all the Company'sLG&E's financial records and related data as well as the minutes of shareholders' and directors' meetings. Management has established and maintains a system of internal controls that provides reasonable assurance that transactions are completed in accordance with management's authorization, that assets are safeguarded and that financial statements are prepared in conformity with generally accepted accounting principles. Management believes that an adequate system of internal controls is maintained through the selection and training of personnel, appropriate division of responsibility, establishment and communication of policies and procedures and by regular reviews of internal accounting controls by the
Company'sLG&E's internal auditors. Management reviews and modifies its system of internal controls in light of changes in conditions and operations, as well as in response to recommendations from the internal auditors. These recommendations for the year ended December 31, 1998,2000, did not identify any material weaknesses in the design and operation of the Company'sLG&E's internal control structure.
The Audit Committee of the Board of Directors is composed entirely of outside directors. In carrying out its oversight role for the financial reporting and internal controls of the Company,LG&E, the Audit Committee meets regularly with the Company'sLG&E's independent public accountants, internal auditors and management. The Audit Committee reviews the results of the independent accountants' audit of the financial statements and their audit procedures, and discusses the adequacy of internal accounting controls. The Audit Committee also approves the annual internal auditing program and reviews the activities and results of the internal auditing function. Both the independent public accountants and the internal auditors have access to the Audit Committee at any time.
Louisville Gas and Electric Company maintains and internally communicates a written code of business conduct that addresses, among other items, potential conflicts of interest, compliance with laws, including those relating to financial disclosure and the confidentiality of proprietary information.

24
40

Louisville Gas and Electric Company
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Louisville Gas and Electric Company:
We have audited the accompanying balance sheets and statements of capitalization of Louisville Gas and Electric Company (a Kentucky corporation and a wholly-owned subsidiary of LG&E Energy Corp.) as of December 31, 19982000 and 1997,1999, and the related statements of income, retained earnings, cash flows and comprehensive income for each of the three years in the period ended December 31, 1998.2000. These financial statements are the responsibility of the
Company'sLG&E's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted auditing
standards.in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Louisville Gas and Electric Company as of December 31, 19982000 and 1997,1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998,2000, in conformity with accounting principles generally accepted accounting principles.

/s/ Arthur Andersen LLP
------------------------
Louisville, Kentucky Arthur Andersen LLP
January 27, 1999 (Except with respect
to the matter discussed in the eighth
and ninth paragraphsUnited States.
Our audits were made for the purpose of Note 3, as to
which the date is February 12, 1999)

---------------------------

LOUISVILLE GAS AND ELECTRIC COMPANY

MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following discussion and analysis by management focuses on those factors
that had a material effectforming an opinion on the Company's financial results of operations and
financial condition during 1998, 1997, and 1996 and should be read in connection
with thebasic financial statements and notes thereto.

Sometaken as a whole. The schedule listed under Item 14(a)2 is presented for purposes 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 Louisville Gas and
Electric Company's reports tocomplying with the Securities and Exchange Commission,Commission's rules and Exhibit No. 99.01is not part of the basic financial statements. This schedule has been subjected to LG&E Energy Corp's report on Form 8-K filed October 21,
1998.

MERGER

Effective May 4, 1998, following the receiptauditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required state and federal
regulatory approvals, LG&E Energy Corp. (LG&E Energy) and KU Energy Corporation
(KU Energy) merged, with LG&E Energyto be set forth therein in relation to the basic financial statements taken as the surviving corporation. The
outstanding preferred stock of a whole.
Louisville, Kentucky Arthur Andersen LLP
January 26, 2001 (Except with respect
to the matters discussed in Note 16, as
to which the date is February 6, 2001.)
41
Louisville Gas and Electric Company (LG&E or the
Company), a subsidiary of LG&E Energy, was not affected by the merger. See Note
2 of Notes to Financial Statements.

RESULTS OF OPERATIONS

Net Income

The Company's net income decreased $35.2 million
Proxy for 1998, as compared to 1997,
primarily due to non-recurring charges for merger-related expenses and the
Environmental Cost Recovery refund of $23.6 million and $2.7 million, after tax,
respectively. Excluding these non-recurring charges, net income decreased $8.9
million. This decrease is mainly due to higher operating expenses at the
electric generating stations and lower gas sales, partially offset by increased
electric sales.

Net income increased $5.3 million for 1997 over 1996. This improvement was
mainly due to increased sales of electricity to wholesale customers, a lower
level of maintenance expenses and increased investment and interest income.
These items were partially offset by reduced gas sales volumes due to warmer
winter weather and a write-off of certain expenses deferred in prior periods.

Revenues

A comparison of operating revenues for the years 1998 and 1997, excluding the
$4.5 million provision recorded for refund of environmental costs previously
recovered from customers (ECR refund), with the immediately preceding year
reflects both increases and decreases, which have been segregated by the
following principal causes (in thousands of $):

INCREASE (DECREASE) FROM PRIOR PERIOD
--------------------------------------------
ELECTRIC REVENUES GAS REVENUES
--------------------- --------------------
CAUSE 1998 1997 1998 1997
----- --------- --------- --------- ---------

Sales to Ultimate Consumers:
Fuel and gas supply adjustments, etc $ 3,750 $ (2,155) $ (4,393) $ 27,192
Merger surcredit .................... (3,466) -- -- --
Demand side management/decoupling ... (6,299) 8,041 (369) 4,348
Environmental cost recovery surcharge (260) 448 -- --
Variation in sales volumes .......... 27,051 (4,810) (42,418) (14,891)
--------------------- --------------------
Total retail sales ................ 20,776 1,524 (47,180) 16,649
Wholesale sales ........................ 28,398 3,088 8,720 --
Gas transportation-net ................. -- -- (71) 147
Other .................................. (695) 3,224 (935) (204)
--------------------- --------------------

Total ............................. $ 48,479 $ 7,836 $(39,466) $ 16,592
--------------------- --------------------
--------------------- --------------------

Electric retail sales increased primarily due to the warmer weather experienced
in 1998 as compared to 1997. Wholesale sales increased due to larger amounts of
power available for off-system sales, an increase in the unit price of the sales
and sales to Kentucky Utilities of $11.6 million due to economic dispatch
following the merger in May 1998 of LG&E Energy Corp. and KU Energy. Gas retail
sales decreased from 1997 due to the warmer weather in 1998. Gas wholesale sales
increased to $8.7 million in 1998 from zero in 1997 due to the implementation of
LG&E's gas performance-based ratemaking mechanism. See Note 3 of Notes to
Financial Statements.

Electric revenues increased in 1997 due to a slightly higher level of wholesale
sales and other revenues. Gas revenues increased primarily as a result of higher
gas supply costs billed to customers through the gas supply clause, partially
offset by decreased gas sales due mainly to warmer weather.

Expenses

Fuel for electric generation and gas supply expenses comprise a large component
of the Company's total operating costs. The Company's electric and gas rates
contain a fuel adjustment clause (FAC) and a gas supply clause, respectively,
whereby increases or decreases in the cost of fuel and gas supply are reflected
in the Company's rates, subject to approval by the Public Service Commission of
Kentucky (Kentucky Commission or Commission).

Fuel for electric generation increased $5.2 million (3.5%) in 1998 because of
higher cost of coal burned ($6.6 million), partially offset by a decrease in
generation ($1.4 million). Fuel expenses incurred in 1997 were approximately the
same as in 1996. The average delivered cost per ton of coal purchased was $22.38
in 1998, $21.66 in 1997, and $21.73 in 1996.

Power purchased expense increased $32.9 million in 1998 to support the increase
in electric sales and increased purchases from Kentucky Utilities of $16 million
as a result of economic dispatch following the merger of the two companies in
May 1998. Power purchased expense increased $.6 million (4%) in 1997 due to an
increase in the amount of purchased power needed to support native load
requirements.

Gas supply expenses decreased $33 million (21%) in 1998 primarily due to a
decrease in the volume of gas delivered to the distribution system. Gas supply
expenses for 1997 increased $18.4 million (13%) because of the higher cost of
net gas supply ($29.3 million), partially offset by a decrease in the volume of
gas delivered to the distribution system ($10.9 million). The average unit cost
per thousand cubic feet (Mcf) of purchased gas was $3.05 in 1998 and $3.46 in
each of 1997 and 1996.

Other operation expenses increased $12.8 million (8.5%) over 1997 because of
increased costs to operate the electric generating plants ($6.6 million),
increased administrative costs ($2.2 million), and amortization of deferred
merger costs ($1.8 million). Other operation expenses increased $7.4 million
(5%) in 1997 primarily because of increased costs to operate the electric
generating plants ($5.1 million) and a write-off of certain previously deferred
items ($3.2 million). Items written off include expenses associated with the
hydro-electric plant and a management audit fee. Even though the Company
believes it could have reasonably expected to recover these costs in future rate
proceedings, it decided not to seek recovery and expensed these costs because of
increasing competitive pressures in the industry.

Maintenance expenses increased $5.2 million (11%) in 1998 as compared to 1997
primarily because of an increase in scheduled outages and general repairs at the
electric generating plants ($2.2 million) and an increase in storm damage
expenses ($1.4 million). Maintenance expenses decreased $7.2 million (13%) in
1997 from 1996 due to decreased repairs at the electric generating plants
resulting from fewer scheduled outages ($5 million) and a lower level of storm
damage repairs ($1.8 million).

Depreciation and amortization for 1998 were approximately the same as in 1997.
Depreciation and amortization increased $4 million (4.5%) in 1997 because of
additional utility plant in service. In addition, 1997 reflects the accelerated
write-off of losses on early retirements of facilities.

Variations in income tax expenses are largely attributable to changes in pre-tax
income.

The Company incurred a pre-tax charge in the second quarter of 1998 for costs
associated with the merger of LG&E Energy and KU Energy of $32.1 million. The
corresponding tax benefit of $8.5 million is recorded in other income and
(deductions). The amount charged is in excess of the amount permitted to be
deferred as a regulatory asset by the Kentucky Public Service Commission. See
Note 2 of Notes to Financial Statements.

Other income for 1997 increased by $3.4 million primarily because of the
recording in 1997 of interest income due to a favorable tax settlement and
the sale of stock options which the Company had acquired in a commercial
transaction. See Note 9 of Notes to Financial Statements.

Interest charges for 1998 decreased $2.9 million (7%) due to the retirement of
the Company's 6.75% Series First Mortgage Bonds and lower interest rates.
Interest charges for 1997 decreased $1.1 million (3%) due to favorable
refinancing activities in 1996. The embedded cost of long-term debt was 5.57% at
December 31, 1998, and 5.68% at December 31, 1997. See Note 10 of Notes to
Financial Statements.

The rate of inflation may have a significant impact on the Company's operations,
its ability to control costs and the need to seek timely and adequate rate
adjustments. However, relatively low rates of inflation in the past few years
have moderated the impact on current operating results.

LIQUIDITY AND CAPITAL RESOURCES

The Company's need for capital funds is largely related to the construction of
plant and equipment necessary to meet the needs of electric and gas utility
customers and protection of the environment.

Construction Expenditures

New construction expenditures for 1998 were $138 million compared with $111
million for 1997 and $108 million for 1996.

Past Financing Activities

During 1998, 1997 and 1996, the Company's primary source of capital was
internally generated funds from operating cash flows. Internally generated funds
provided financing for 100% of the Company's construction expenditures for 1998,
1997 and 1996.

The Company's combined cash and marketable securities balance decreased by $20
million in 1998 and increased $9 million in 1997. The decrease for 1998 reflects
retirement of a $20 million first mortgage bond. In 1997, the increase reflects
cash flows from operations, partially offset by construction expenditures and
dividends paid.

Variations in accounts receivable and accounts payable are not generally
significant indicators of the Company's liquidity, as such variations are
primarily attributable to fluctuations in weather in the Company's service
territory, which has a direct effect on sales of electricity and natural gas.

On June 1, 1998, the Company's First Mortgage Bonds, 6.75% Series of $20 million
matured and were retired by the Company. The bonds were redeemed with available
funds.

from these bonds were used to redeem the outstanding 7.75% Series of
Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control
Bonds due February 1, 2019.

Future Capital Requirements

Future financing requirements may be affected in varying degrees by factors such
as load growth, changes in construction expenditure levels, rate actions by
regulatory agencies, new legislation, market entry of competing electric power
generators, changes in environmental regulations and other regulatory
requirements. The Company estimates construction expenditures will total $384
million for 1999 and 2000. This estimate includes capital expenditures
associated with installation of low nitrogen oxide burner systems as described
in "Environmental Matters."

In July 1998, following LG&E Energy's decision to discontinue its merchant
energy trading and sales business, Standard & Poor's (S&P) downgraded the credit
ratings of LG&E Energy and its subsidiaries while Moody's and Duff & Phelps
(D&P) kept LG&E Energy and its subsidiaries at their prior ratings.

The Company's current debt ratings are:

MOODY'S S&P D&P
--------------------------------------

First mortgage bonds Aa2 A+ AA
Unsecured debt Aa3 A AA-
Preferred stock aa3 A- AA-

These ratings reflect the views of Moody's, S&P and D&P. An explanation of the
significance of these ratings may be obtained from them. 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.

Future Sources of Financing

Internally generated funds from operations and new debt are expected to fund
substantially all anticipated construction expenditures in 1999 and 2000.

At December 31, 1998, the Company had unused lines of credit of $200 million for
which it pays commitment fees. These credit facilities provide for short-term
borrowing and are scheduled to expire in 2001. Management expects to renegotiate
them when they expire.

To the extent permanent financings are needed in 1999 and 2000, the Company
expects that it will have ready access to the securities markets to raise needed
funds.

Market Risks

The Company is exposed to market risks from changes in interest rates and
commodity prices. To mitigate changes in cash flows attributable to these
exposures, the Company has entered into various derivative financial
instruments. Derivative positions are monitored using techniques that include
market value and sensitivity analysis.

Interest Rate Sensitivity

The Company has certain variable rate Pollution Control Bonds outstanding. At
December 31, 1998, the potential change in interest expense associated with a
1% change in base interest rates of the Company's unswapped debt is estimated
at $.8 million.

Interest rate swaps are used to hedge the Company's underlying variable rate
debt obligations. These swaps hedge specific debt issuance and consistent
with management's designation are accorded hedge accounting treatment.

The Company has entered into swaps to reduce the impact of interest rate
changes on its Pollution Control Bonds. The swap agreements involve the
exchange of floating-rate interest payments for fixed interest payments over
the life of the agreements. As of December 31, 1998, 67% of the outstanding
variable interest rate borrowings were converted to fixed interest rates
through swaps. The potential loss in fair value from these positions
resulting from a hypothetical 1% adverse movement in base interest rates is
estimated at $3.5 million as of December 31, 1998. See Note 4 of Notes to
Financial Statements.

In April 1998, the Company entered into a forward starting swap agreement.
The forward swap involves the exchange of floating-rate interest payments for
fixed interest payments over the life of the agreement. The forward swap was
entered into to hedge the Company's exposure to interest rates for the
anticipated call of its Trimble County, Kentucky, Pollution Control Bonds,
7-5/8% Series, due November 1, 2020. The potential loss in fair value from this
position resulting from a hypothetical 10% change in the yield curve is
estimated at $7.5 million as of December 31, 1998. See Note 4 of Notes to
Financial Statements.

Commodity Price Sensitivity

The Company has limited exposure to market volatility in prices of fuel or
electricity, as long as cost-based regulations exist. To mitigate residual
risks relative to the movements in fuel or in electricity prices, the Company
has entered into primarily fixed-priced contracts for the purchase and sale
of electricity through the wholesale electricity market. Realized gains and
losses are recognized in the income statement as incurred. At December 31,
1998, exposure from these activities was not material to the financial
statements of the Company.

Year 2000 Computer Software Issue

The Company uses various software, systems and technology that may be affected
by the "Year 2000 Issue." This concerns the ability of electronic processing
equipment (including microprocessors embedded in other equipment) to properly
process the millennium change to the year 2000 and related issues. A failure to
timely correct any such processing problems could result in material operational
and financial risks if significant systems either cease to function or produce
erroneous data. Such risks are more fully described in the sections that follow,
but could include an inability to operate its generating plants, disruptions in
the operation of transmission and distribution systems and an inability to
access interconnections with the systems of neighboring utilities.

The Company began its project regarding the Year 2000 issue in 1996. The Board
of Directors has approved the general Year 2000 plan and receives regular
updates. In addition, monthly reporting procedures have been established at
senior management levels. Since 1996, a single-purpose Year 2000 team has been
established in the Information Technology (IT) Department. This team, which is
headed by an officer of the Company, is responsible for planning, implementing,
and documenting the Company's Year 2000 process. The team also provides direct
and detailed assistance to the Company's operational divisions and smaller
units, where identified personnel are responsible for Year 2000 work and
remediation in their specific areas. In many cases, the Company also uses the
services of third parties, including technical consultants, vendor
representatives and auditors.

The Company's Year 2000 effort generally follows a three-phase process:

Phase I - inventory and identify potential Year 2000 issues,
determine solutions;

Phase II - survey vendors regarding their Year 2000 readiness, determine
solutions to deal with possible vendor non-compliance, develop work plans
regarding Company and vendors non-compliance issues; and

Phase III - implementation, testing, certification, contingency planning.

The Company has long recognized the complexity of the Year 2000 issue. Work
has progressed concurrently on (a) replacing or modifying IT systems,
including mainframes, client-server, PCs and software applications, (b)
replacing or modifying non-IT systems, including embedded systems such as
mechanical control units and (c) evaluating the readiness of key third
parties, including customers, suppliers, business partners and neighboring
utilities.

State of Readiness

As of January 1999, the Company has substantially completed the internal
inventory, vendor survey and compliance assessment portions (Phases I and II)
of its Year 2000 plan for critical mainframe and PC hardware and software.
Remediation efforts (Phase III) in these areas are approximately 65%
complete. With respect to embedded systems, the Company has also
substantially completed its Phase I and Phase II efforts. Phase III
remediation efforts are also in progress for embedded systems. Testing has
commenced and will continue as remediation efforts are implemented and are
expected to run until July 1999.

As a general matter, corrective action for major IT systems, including
customer information and financial systems, are in process or have been
completed. For smaller or more isolated systems, including embedded and plant
operational systems, the Company has completed much of the evaluative process
and is commencing corrective plans. The Company has communicated with its key
suppliers, customers and business partners regarding their Year 2000
progress, particularly in the IT software and embedded component areas, to
determine the areas in which the Company's operations are vulnerable to those
parties' failure to complete their remediation efforts. The Company is
currently evaluating and, in certain cases, initiating follow-up actions
regarding the responses from these parties. The Company regularly attends and
participates in trade group efforts focusing on Year 2000 issues in the
energy industry.
32

Costs of Year 2000 Issues

The Company's system modification costs related to the Year 2000 issue are
being expensed as incurred, while new system installations are generally
being capitalized pursuant to generally accepted accounting principles. See
Note 1 of Notes to Financial Statements. Through December 1998, the Company
has incurred approximately $16 million in capital and operating costs in
connection with the Year 2000 issue. Based upon studies and projections to
date, the Company expects to spend an additional $4.6 million to complete its
Year 2000 efforts.

It should be noted that these figures include total hardware, software,
embedded systems and consulting costs. In many cases, these costs include
system replacements which were already contemplated or which provided
additional benefits or efficiencies beyond the Year 2000 aspect.
Additionally, many costs are not incremental costs but constitute
redeployment of existing IT and other resources. These costs represent
management's current estimates; however, there can be no assurance that
actual costs associated with the Company's Year 2000 issues will not be
higher.

Risks of Year 2000 Issues

As described above, the Company has made significant progress in the
implementation of its Year 2000 plan. Based upon the information currently
known regarding its internal operations and assuming successful and timely
completion of its remediation plan, the Company does not anticipate material
business disruptions from its internal systems due to the Year 2000 issue.
However, the Company may possibly experience limited interruptions to some
aspects of its activities, whether IT, generation, transmission or
distribution, operational, administrative functions or otherwise, and the
Company is considering such potential occurrences in planning for the most
reasonably likely worst-case scenarios.

Additionally, risk exists regarding the non-compliance of third parties with
key business or operational importance to the Company. Year 2000 problems
affecting key customers, interconnected utilities, fuel suppliers and
transporters, telecommunications providers or financial institutions could
result in lost power or gas sales, reduced power production or transmission
capabilities or internal operational or administrative difficulties on the
part of the Company. The Company is not presently aware of any such
situations; however, severe occurrences of this type could have material
adverse impacts upon the business, operating results or financial condition
of the Company. There can be no assurance that the Company will be able to
identify and correct all aspects of the Year 2000 problem among these third
parties that affect it in sufficient time, that it will develop adequate
contingency plans or that the costs of achieving Year 2000 readiness will not
be material.

Contingency planning is under way for material areas of Year 2000 risk. This
effort will address certain areas, including the most reasonably likely
worst-case scenarios and delays in completion in the Company's remediation
plans, failure or incomplete remediation results and failure of key third
parties to be Year 2000 compliant. Contingency plans will include provisions
for extra staffing, back-up communications, review of unit dispatch and load
shedding procedures, carrying of additional energy reserves and manual energy
accounting procedures. Completion of contingency plan formation is scheduled
for June 1999.

Forward-Looking Statements

The foregoing discussion regarding the timing, effectiveness, implementation
and cost of the Company's Year 2000 efforts, contains forward-looking
statements, which are based on management's best estimates and assumptions.
These forward-looking statements involve inherent risks and uncertainties,
and actual results could differ materially from those contemplated by such
statements. Factors that might cause material differences include, but are
not limited to, the availability of key Year 2000 personnel, the Company's
ability to locate and correct all relevant computer codes, the readiness of
third parties and the Company's ability to respond to unforeseen Year 2000
complications and other factors described from time to time in the Company's
reports to the Securities and Exchange Commission, and Exhibit 99.01 to LG&E
Energy Corp.'s Form 8-K filed October 21, 1998. Such material differences
could result in, among other things, business disruption, operational
problems, financial loss, legal liability and similar risks.

Rates and Regulation

The Company is subject to the jurisdiction of the Kentucky Commission in
virtually all matters related to electric and gas utility regulation, and as
such, its accounting is subject to Statement of Financial Accounting
Standards No. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION
(SFAS No. 71). Given the Company's competitive position in the market and the
status of regulation in the state of Kentucky, the Company has no plans or
intentions to discontinue its application of SFAS No. 71. See Note 3 of Notes
to Financial Statements.

Since May 1995, the Company implemented an environmental cost recovery (ECR)
surcharge to recover certain environmental compliance costs. Such costs
include compliance with the 1990 Clean Air Act, as amended, and other
environmental regulations, including those applicable to coal combustion
wastes and related by-products. The ECR mechanism was authorized by state
statute in 1992 and was first approved by the Kentucky Commission in a
Kentucky Utility case in July 1994.

The Commission's order approving the surcharge in the KU case and the
constitutionality of the surcharge were challenged by certain intervenors,
including the Attorney General of Kentucky, in Franklin Circuit Court.
Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995
and December 1997, respectively, have upheld the constitutionality of the ECR
statute but differed on a claim of retroactive recovery of certain amounts.
The Commission ordered that certain surcharge revenues collected by the
Company be subject to refund pending final determination of all appeals.

In January 1994, the Company implemented a Commission-approved demand side
management (DSM) program that the Company, the Jefferson County Attorney, and
representatives of several customer interest groups had filed with the
Commission. The program included a rate mechanism that (1) provided the
Company concurrent recovery of DSM costs, (2) provided an incentive for
implementing DSM programs and (3) allowed the Company to recover revenues
from lost sales associated with the DSM program (decoupling). In June 1998,
the Company and customer interest groups requested an end to the decoupling
rate mechanism. On June 1, 1998, the Company discontinued recording revenues
from lost sales due to DSM. Accrued decoupling revenues recorded for periods
prior to June 1, 1998, will continue to be collected through the DSM recovery
mechanism. On September 23, 1998, the Commission accepted the Company's
modified tariff reflecting this proposal effective as of June 1, 1998.

In October 1998, LG&E and KU filed separate, but parallel applications with
the Commission for approval of a new method of determining electric rates
that provides financial incentives for LG&E and KU to further reduce
customers' rates. The filing was made pursuant to the September 1997
Commission order approving the merger of LG&E Energy and KU Energy, wherein
the Commission directed LG&E and KU to indicate whether they desired to
remain under traditional rate of return regulation or commence
non-traditional regulation. The new ratemaking method, known as
performance-based ratemaking (PBR), would include financial incentives for
LG&E and KU to reduce fuel costs and increase generating efficiency, and to
share any resulting savings with customers. Additionally, the PBR provides
financial penalties and rewards to assure continued high quality service and
reliability.

The PBR plan proposed by LG&E and KU consists of five components:

o The utilities' fuel adjustment clause mechanism will be withdrawn
and replaced with a cap that limits recovery of actual changes in
fuel cost to changes in a fuel price index for a five-state
region. If the utilities outperform the index, benefits will be
shared equally between shareholders and customers. If the
utilities' fuel costs exceed the index, the difference will be
absorbed by LG&E Energy shareholders.

o Customers will continue to receive the benefits from the
post-merger joint dispatch of power from LG&E's and KU's
generating plants.

o Power plant performance will be measured against the best
performance achieved between 1991 and 1997. If the performance
exceeds this level, customers will share in up to $10 million
annually of benefits from this performance at each of LG&E and KU.

o The utilities will be encouraged to maintain and improve service
quality, reliability, customer satisfaction and safety, which will
be measured against six objective benchmarks. The plan provides
for annual rewards or penalties to the Company of up to $5 million
per year at each of LG&E and KU.

o The plan provides the utilities with greater flexibility to
customize rates and services to meet customer needs. Services will
continue to be priced above marginal cost and customers will
continue to have the option to elect standard tariff service.

These proposals are subject to approval by the Commission. Approval
proceedings commenced in October 1998 and a final decision likely will occur
in 1999. Several intervenors are participating in the case. Some have
requested that the Commission reduce base rates before implementing PBR. The
Company is not able to predict the ultimate outcome of these proceedings,
however, should the Commission mandate significant rate reductions, through
the PBR proposal or otherwise, such actions could have a material effect on
the Company's financial condition and results of operations.

Since October 1997, the Company has implemented a Commission-approved,
experimental performance-based ratemaking mechanism related to gas
procurement activities and off-system gas sales only. During the three-year
test period beginning October 1997, rate adjustments related to this
mechanism will be determined for each 12-month period beginning November 1
and ending October 31. During the first year of the mechanism ended
October 31, 1998, the Company recorded $3.6 million for its share of reduced
gas costs. The $3.6 million will be billed to customers through the gas supply
clause beginning February 1, 1999.

In December 1997, the Kentucky Commission opened Administrative Case No. 369 to
consider Commission policy regarding cost allocations, affiliate transactions
and codes of conduct governing the relationship between utilities and their
non-utility operations and affiliates. The Commission intends to address two
major areas in the proceedings: the tools and conditions needed to prevent cost
shifting and cross-subsidization between regulated and non-utility operations;
and whether a code of conduct should be established to assure that non-utility
segments of the holding company are not engaged in practices which result in
unfair competition caused by cost shifting from the non-utility affiliate to the
utility. In September 1998, the Commission issued draft code of conduct and cost
allocation guidelines. In January 1999, the Company, as well as all parties to
the proceeding, filed comments on the Commission draft proposals. Initial
hearings are scheduled for the first quarter of 1999. Management does not expect
the ultimate resolution of this matter to have a material adverse effect on the
Company's financial position or results of operations.

On February 12, 1999, the Company received orders from the Kentucky Commission
requiring a refund to retail electric customers of approximately $3.9 million
resulting from reviews of the FAC. The Company estimates up to an additional
$1.3 million could be refundable to retail electric customers through future
Kentucky Commission orders. See Note 3 of Notes to Financial Statements.

The Kentucky Commission granted the Company's motion to suspend the refund
obligation until further direction by the Commission. The Commission advised
that the Company may have to pay interest on the refund amounts during the
suspension period. The Company is awaiting a Commission response to a motion to
revoke the orders, or in the alternative, grant a rehearing.

Environmental Matters

The Clean Air Act Amendments of 1990 (the Act) imposed stringent new sulfur
dioxide (S02) emission limits. The Company is currently in compliance with the
Phase II S02 emission limits required by the year 2000, as it had previously
installed scrubbers on all of its coal-fired generating units. The Company met
the nitrogen oxide (NOx) emission reduction requirements of the Act through
installation of low-NOx burner systems. The Company's compliance plans are
subject to many factors including developments in the emission allowance and
fuel markets, future regulatory and legislative initiatives,

and advances in clean air control technology. The Company will continue to
monitor these developments to ensure that its environmental obligations are
met in the most efficient and cost-effective manner.

In September 1998, the U.S. Environmental Protection Agency announced its final
regulation requiring significant additional reductions in NOx emissions to
mitigate alleged ozone transport to the Northeast. While each state is free to
allocate its assigned NOx reductions among various emissions sectors as it deems
appropriate, the regulation may ultimately require utilities to reduce their NOx
emissions to 0.15 lb./mmBtu (million British thermal units) - an 85% reduction
from 1990 levels. Under the regulation, each state must incorporate the
additional NOx reductions in its State Implementation Plan (SIP) by September
1999 and affected sources must install control measures by May 2003, unless
granted extensions. Several states, various labor and industry groups, and
individual companies have appealed the final regulation to the U.S. Court of
Appeals for the D.C. Circuit. Management is currently unable to determine the
outcome or exact impact of this matter until such time as the states identify
specific emissions reductions in their SIPs and the courts rule on the various
legal challenges to the final rule. However, if the 0.15 lb. target is
ultimately imposed, the Company will be required to incur significant capital
expenditures and increased operation and maintenance costs for additional
controls.

Subject to further study and analysis, the Company estimates that it may incur
capital costs in the range of $100 million to $200 million. These costs would
generally be incurred beginning in 2000. The Company believes its costs in this
regard to be comparable to those of similarly situated utilities with like
generation assets. The Company anticipates that such capital and operating costs
are the type of costs that are eligible for cost recovery from customers under
its environmental surcharge mechanism and believes that a significant portion of
such costs could be recovered. However, Kentucky Commission approval is
necessary and there can be no guarantee of such recovery.

See Note 12 of Notes to Financial Statements for a complete discussion of the
Company's environmental issues concerning manufactured gas plant sites and
certain other environmental issues.

FUTURE OUTLOOK

Competition and Customer Choice

LG&E Energy has moved aggressively over the past decade to be positioned for,
and to help promote, the energy industry's shift to customer choice and a
competitive market for energy services. Specifically, LG&E Energy has taken many
steps to prepare for the expected increase in competition in its regulated and
non-utility energy services businesses, including support for performance-based
ratemaking structures; aggressive cost reduction activities; strategic
acquisitions, dispositions and growth initiatives; write-offs of previously
deferred expenses; an increase in focus on commercial and industrial customers;
an increase in employee training; and necessary corporate and business unit
realignments. LG&E Energy continues to be active in the national debate
surrounding the restructuring of the energy industry and the move toward a
competitive, market-based environment. LG&E Energy has urged Congress to set a
specific date for a complete transition to a competitive market, one that will
quickly and efficiently bring the benefits associated with customer choice. LG&E
Energy has previously advocated the implementation of this transition by January
1, 2001, and now recommends that adoption of federal legislation specifying a
date certain and appropriate transition regulations implementing deregulation.

In December 1997, the Kentucky Commission issued a set of principles which are
intended to serve as its guide in consideration of issues relating to industry
restructuring. Among the issues addressed by these principles are: consumer
protection and benefit, system reliability, universal service, environmental
responsibility, cost allocation, stranded costs and codes of conduct. During
1998, the Kentucky Commission and a task force of the Kentucky General Assembly
have each initiated proceedings, including meetings with representatives of
utilities, consumers, state agencies and other groups in Kentucky, to discuss
the possible structure and effects of energy industry restructuring in Kentucky.
The purpose of the task force is to make recommendations to the Kentucky General
Assembly for possible legislative action during its 2000 session.

However, at the time of this report, neither the Kentucky General Assembly nor
the Kentucky Commission has adopted or approved a plan or timetable for retail
electric industry competition in Kentucky. The nature or timing of the ultimate
legislative or regulatory actions regarding industry restructuring and their
impact on the Company, which may be significant, cannot currently be predicted.

[LGE ENERGY LOGO]

-------------------------
ADMISSION TICKET

LOUISVILLE GAS AND ELECTRIC COMPANY

ANNUAL MEETING OF SHAREHOLDERS

Wednesday, April 21, 1999
10:00 a.m., EDT
Bomhard Theater
Kentucky Center for the Arts
501 West Main Street
Louisville, Kentucky

If you plan to attend the meeting, please check the box on the proxy card
indicating that you plan to attend. Please bring this Admission Ticket to the
meeting with you.

THE BOTTOM PORTION OF THIS FORM IS THE PROXY CARD. Each proposal is fully
explained in the enclosed Notice of Annual Meeting of Shareholders and Proxy
Statement. To vote your proxy, please MARK by placing an "X" in the appropriate
box, SIGN and DATE the proxy. Then please DETACH and RETURN the completed proxy
promptly in the enclosed envelope.

TRIANGLE DETACH HERE TRIANGLE TRIANGLE DETACH HERE TRIANGLE

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH PROPOSAL

1. ELECTION OF DIRECTORS / / I plan to attend the Annual Meeting,
/ / For / / Withheld and I will bring guest(s).
For, except vote withheld from
the following nominee(s):
------------------------------

Terms expiring in:

2002: MIRA S. BALL ANNE H. MCNAMARA
ROGER W. HALE FRANK V. RAMSEY,
JR.
DAVID B. LEWIS
2001: CAROL M. GATTON
LEE T. TODD, JR.
2000: WILLIAM L. ROUSE, JR.
CHARLES L. SHEARER

2. APPROVAL OF ARTHUR ANDERSEN LLP ------------------------------------------
AS INDEPENDENT AUDITORS
SIGNATURE

/ / For / / Against / / Abstain ------------------------------------------
DATE

1. PREFERRED
[LGE ENERGY LOGO]
PROXY
2. ------------------------------------------
SIGNATURE
SIGNATURE(S) SHOULD CORRESPOND TO THE
NAME(S) APPEARING IN THIS PROXY. IF
EXECUTOR, TRUSTEE, GUARDIAN, ETC. PLEASE
INDICATE.

Complimentary parking will be available
at the Riverfront PARC garage off Sixth
Street. Please visit the registration
table at the annual meeting for a
[MAP] parking voucher, which you should submit
with your parking ticket to the
attendant upon leaving.

TRIANGLE DETACH HERE TRIANGLE TRIANGLE DETACH HERE TRIANGLE

LOUISVILLE GAS AND ELECTRIC COMPANY

PROXY FOR ANNUAL MEETING OF SHAREHOLDERS -- APRIL 21, 1999

Roger W. Hale,
December 19, 2001
Victor A. Staffieri, and John R. McCall areand S. Bradford Rives hereby appointed as proxies, with full power of substitution to vote the shares of the shareholder(s) named on the reverse side hereof at the Annual Meeting of Shareholders of Louisville Gas and Electric Company to be held on April 21,
1999,December 19, 2001 and at any adjournment thereof, as directed on the reverse side hereof, and in their discretion to act upon any other matters that may properly come before the meeting or any adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND WILL BE VOTED AS YOU SPECIFY. IF NOT SPECIFIED, THIS PROXY WILL BE VOTED FOR ALL OF THE PROPOSALS. A VOTE FOR PROPOSAL 1 INCLUDES DISCRETIONARY AUTHORITY TO CUMULATE VOTES SELECTIVELY AMONG THE NOMINEES AS TO WHOM AUTHORITY TO VOTE HAS NOT BEEN WITHHELD.
Please mark, sign and date this proxy on the reverse side and return the completed proxy promptly in the enclosed envelope.
Admission Ticket
Louisville Gas and Electric Company
Annual Meeting of Shareholders
Wednesday, December 19, 2001
2:00 p.m., Louisville time
Third Floor Assembly Room
LG&E Building
220 West Main Street
Louisville, Kentucky
If you plan to attend the meeting, please check the box on the proxy card indicating that you plan to attend. Please bring this Admission Ticket to the meeting with you.
Each proposal is fully explained in the enclosed Notice of Annual Meeting of Shareholders and Proxy Statement. To vote your proxy, please MARK by placing an "X" in the appropriate box. SIGN and DATE this proxy. Then please DETACH and RETURN the completed proxy promptly in the enclosed envelope.
Complimentary parking will be available at the LG&E Building Garage off Market Street and The Actors Theatre Garage off Main Street. Please visit the registration table at the annual meeting for a parking voucher, which you should submit with your parking ticket to the attendant upon leaving.
+ LOUISVILLE GAS AND ELECTRIC COMPANY
DECEMBER 19, 2001 2:00 P.M.
/ /

/ /

Mark this box with X if you have made changes to your name or address details below.

Proxy Card
Please mark votes in boxes in the following manner using dark ink only. X
The Board of Directors Unanimously Recommends a Vote "FOR" the selected nominees The Board of Directors Unanimously Recommends a Vote "FOR" the following proposals
1. Election of Directors For Withhold For Against Abstain
2. Approval of PricewaterhouseCoopers LLP as Independent Auditors / / / / / /
Terms expiring in 2002:

01.

Sydney Gillibrand CBE

/ /

02.

Nicholas P. Baldwin

/ /

03.

Victor A. Staffieri

/ /

I plan to attend the Annual Meeting

/ /

Terms expiring in 2003:

04.

Edmund A. Wallis

/ /

I will bring the indicated number of guests to the annual meeting.

/ /

05. Dr. David K-P Li / / / /

Terms expiring in 2004:

06.

Sir Frederick Crawford

/ /

07.

David J. Jackson

/ /

Signature(s) should correspond to the name(s) appearing in this proxy. If executor, trustee, guardian, etc. please indicate.
Signature Signature Date

+ +

QuickLinks
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
ELECTION OF DIRECTORS
APPROVAL OF INDEPENDENT AUDITORS FOR 2001
REPORT OF THE REMUNERATION COMMITTEE
2000 Summary Compensation Table
APPENDIX A
LOUISVILLE GAS AND ELECTRIC COMPANY 2000 FINANCIAL REPORT TABLE OF CONTENTS
INDEX OF ABBREVIATIONS
Louisville Gas and Electric Company Selected Financial Data.
Louisville Gas and Electric Company Management's Discussion and Analysis of Results of Operations and Financial Condition.
Louisville Gas and Electric Company Statements of Income (Thousands of $)
Statements of Retained Earnings (Thousands of $)
Louisville Gas and Electric Company Statements of Comprehensive Income (Thousands of $)
Louisville Gas and Electric Company Balance Sheets (Thousands of $)
Louisville Gas and Electric Company Statements of Cash Flows (Thousands of $)
Louisville Gas and Electric Company Statements of Capitalization (Thousands of $)
Louisville Gas and Electric Company Notes to Financial Statements
Louisville Gas and Electric Company REPORT OF MANAGEMENT
Louisville Gas and Electric Company REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Filed by the Registrant /x/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ /		Preliminary Proxy Statement
/ /		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
/x/		Definitive Proxy Statement
/ /		Definitive Additional Materials
/ /		Soliciting Material Pursuant to §240.14a-12

Louisville Gas and Electric Company
(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
/x/	No fee required
/ /	Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
	(1)	Title of each class of securities to which transaction applies:
	(2)	Aggregate number of securities to which transaction applies:
	(3)	Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
	(4)	Proposed maximum aggregate value of transaction:
	(5)	Total fee paid:
/ /	Fee paid previously with preliminary materials.
/ /	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
	(1)	Amount Previously Paid:
	(2)	Form, Schedule or Registration Statement No.:
	(3)	Filing Party:
	(4)	Date Filed:

Common Stock, without par ~~value............................~~ value		21,294,223 shares
Preferred Stock, par value $25 per share, 5% ~~Series........~~ Series		860,287 shares
Preferred Stock, without par value, $5.875 ~~Series..........~~ Series		250,000 shares
Auction Series A (stated value $100 per share)~~.............~~		500,000 shares

						Long-Term Compensation
	Annual Compensation					Awards
	Annual Compensation					Awards		Payouts
				Other Annual Comp. ($)		Restricted Stock Awards ($)		Payouts		All Other Compen- sation ($)
Name and Principal Position	Year	Salary ($)	Bonus ($)	Other Annual Comp. ($)		Restricted Stock Awards ($)		Securities Underlying Options/SARs (#)	LTIP Payouts ($)(1)	All Other Compen- sation ($)
Roger W. Hale Chairman of the Board and Chief Executive Officer(5)	2000 1999 1998	816,200 770,000 700,000	803,761 703,800 649,800	3,546,581 47,599 32,301	(2)	— 2,919,489 —	(4)	190,000 102,122 133,588	3,870,758 0 821,272	5,085,473 55,596 36,191	(3)
Victor A. Staffieri President and Chief Operating Officer(5)	2000 1999 1998	460,000 400,000 300,000	388,277 324,600 150,461	24,247 22,730 10,269		262,880 — —	(6)	90,000 53,050 45,802	1,051,694 0 166,611	640,160 20,604 15,590	(3)
John R. McCall Executive Vice President, General Counsel and Corporate Secretary	2000 1999 1998	325,000 300,000 260,000	228,605 204,930 140,399	18,177 7,171 7,870		172,028 — —	(6)	40,000 31,830 34,733	570,565 0 96,635	677,097 17,252 15,582	(3)
Frederick J. Newton III Senior Vice President and Chief Administrative Officer	2000 1999 1998	272,000 255,000 217,100	191,325 171,641 99,253	14,970 6,731 69,229		143,974 — —	(6)	30,000 12,219 14,875	356,334 0 —	814,961 8,712 3,328	(3)
R. Foster Duncan Executive Vice President And Chief Financial Officer (7)	2000 1999 1998	342,000 325,000 262,903	240,563 215,788 210,000	29,240 52,440 69,687	(8)	— — —		60,000 34,483 81,221	720,730 0 —	24,596 15,623 4,785	(3)

Name	Number of Securities Underlying Options/SARs Granted (#) (1)	Percent of Total Options/SARs Granted to Employees in Fiscal Year		Exercise Or Base Price ($/Share)	Expiration Date	5%($)	10%($)
Roger W. Hale	190,000	21.6	%	16.94	02/02/2010	2,024,160	5,129,619
Victor A. Staffieri	90,000	10.2	%	16.94	02/02/2010	958,813	2,429,820
John R. McCall	40,000	4.5	%	16.94	02/02/2010	426,139	1,079,920
Frederick J. Newton	30,000	3.4	%	16.94	02/02/2010	319,604	809,940
R. Foster Duncan	60,000	6.8	%	16.94	02/02/2010	639,208	1,619,880

Name	Shares Acquired On Exercise (#)	Value Realized ($)	Number of Securities Underlying Unexercised Options/SARs at FY-End (#) Exercisable/Unexercisable	Value of Unexercised In-The-Money Options/SARs at FY-End ($)(1) Exercisable/Unexercisable
Roger W. Hale	459,630	2,000,789	74,864/0	322,664/—
Victor A. Staffieri	246,338	1,229,426	38,890/0	167,616/—
John R. McCall	62,046	410,832	60,235/0	363,280/—
Frederick J. Newton	30,000	237,300	27,094/0	111,154/—
R. Foster Duncan	60,000	487,350	84,819/0	530,800/—

		Estimated Future Payouts under Non-Stock Price Based Plans (number of shares)(1)
Name	Number of Shares, Units or Other Rights	Performance or Other Period Until Maturation Or Payout(1)	Threshold(#)	Target(#)	Maximum(#)
Roger W. Hale	55,307	12/31/2002	22,123	55,307	82,961
Victor A. Staffieri	18,308	12/31/2002	7,323	18,308	27,462
John R. McCall	8,482	12/31/2002	3,393	8,482	12,723
Frederick J. Newton	6,004	12/31/2002	2,402	6,004	9,006
R. Foster Duncan	11,651	12/31/2002	4,660	11,651	17,477

		Years of Service
Remuneration		15		20		25		30 or more
$	100,000	$	46,804	$	46,804	$	46,804	$	55,188
$	200,000	$	110,804	$	110,804	$	110,804	$	110,804
$	300,000	$	174,804	$	174,804	$	174,804	$	174,804
$	400,000	$	238,804	$	238,804	$	238,804	$	238,804
$	500,000	$	302,804	$	302,804	$	302,804	$	302,804
$	600,000	$	366,804	$	366,804	$	366,804	$	366,804
$	700,000	$	430,804	$	430,804	$	430,804	$	430,804
$	800,000	$	494,804	$	494,804	$	494,804	$	494,804
$	900,000	$	558,804	$	558,804	$	558,804	$	558,804
$	1,000,000	$	622,804	$	622,804	$	622,804	$	622,804
$	1,100,000	$	686,804	$	686,804	$	686,804	$	686,804
$	1,200,000	$	750,804	$	750,804	$	750,804	$	750,804
$	1,300,000	$	814,804	$	814,804	$	814,804	$	814,804
$	1,400,000	$	878,804	$	878,804	$	878,804	$	878,804
$	1,500,000	$	942,804	$	942,804	$	942,804	$	942,804
$	1,600,000	$	1,006,804	$	1,006,804	$	1,006,804	$	1,006,804
$	1,700,000	$	1,070,804	$	1,076,804	$	1,076,804	$	1,076,804

Index of Abbreviations		2
Selected Financial Data		3
Management's Discussion and Analysis		4
Statements of Income		15
Statements of Retained Earnings		15
Statements of Comprehensive Income		16
Balance Sheets		17
Statements of Cash Flows		18
Statements of Capitalization		19
Notes to Financial Statements		20
Report of Management		40
Report of Independent Public Accountants		41

Capital Corp.		LG&E Capital Corp.
Clean Air Act		The Clean Air Act, as amended in 1990
CNN		Certificate of Public Convenience and Necessity
CT		Combustion Turbines
DSM		Demand Side Management
ECR		Environmental Cost Recovery
EEI		Electric Energy, Inc.
EITF		Emerging Issues Task Force Issue
EPA		U.S. Environmental Protection Agency
ESM		Earnings Sharing Mechanism
FAC		Fuel Adjustment Clause
FERC		Federal Energy Regulatory Commission
FPA		Federal Power Act
FT		Firm Transportation
GSC		Gas Supply Clause
Holding Company Act		Public Utility Holding Company Act of 1935
IBEW		International Brotherhood of Electrical Workers
IMEA		Illinois Municipal Electric Agency
IMPA		Indiana Municipal Power Agency
Kentucky Commission		Kentucky Public Service Commission
KIUC		Kentucky Industrial Utility Consumers, Inc.
KU		Kentucky Utilities Company
KU Energy		KU Energy Corporation
Kva		Kilovolt-ampere
LEM		LG&E Energy Marketing Inc.
LG&E		Louisville Gas and Electric Company
LG&E Energy		LG&E Energy Corp.
LG&E Services		LG&E Energy Services Inc.
Mcf		Thousand Cubic Feet
Merger Agreement		Agreement and Plan of Merger dated May 20, 1997
MGP		Manufactured Gas Plant
Mmbtu		Million British thermal units
Moody's		Moody's Investor Services, Inc.
Mw		Megawatts
Mwh		Megawatt hours
NAAQS		National Ambient Air Quality Standards
NNS		No-Notice Service
NOx		Nitrogen Oxide
PBR		Performance-Based Ratemaking
Powergen		Powergen plc
PUHCA		Public Utility Holding Company Act of 1935
S&P		Standard & Poor's Rating Services
SCR		Selective Catalytic Reduction
SEC		Securities And Exchange Commission
SERP		Supplemental Employee Retirement Plan
SFAS		Statement of Financial Accounting Standards
SIP		State Implementation Plan
SO₂		Sulfur Dioxide
Tennessee Gas		Tennessee Gas Pipeline Company
Texas Gas		Texas Gas Transmission Corporation
TRA		Tennessee Regulatory Authority
Trimble County		LG&E's Trimble County Unit 1
USWA		United Steelworkers of America
Utility Operations		Operations of LG&E and KU

		2000			1999			1998			1997		1996
LG&E:
Operating revenues:
Revenues		$	985,947		$	969,984		$	854,556		$	845,543	$	821,115
Provision for rate refunds			(2,500	)		(1,735	)		(4,500	)		—		—

	Total operating revenues		983,447			968,249			850,056			845,543		821,115

Net operating income:
Before unusual items			150,361			142,263			138,207			148,186		147,263
Provision for rate refunds			(1,491	)		(2,172	)		(2,684	)		—		—

	Total net operating income		148,870			140,091			135,523			148,186		147,263

Net income:
Before unusual items			112,064			108,442			104,381			113,273		107,941
Provision for rate refunds			(1,491	)		(2,172	)		(2,684	)		—		—
Merger costs			—			—			(23,577	)		—		—

	Net income		110,573			106,270			78,120			113,273		107,941

Net income available for common stock			105,363			101,769			73,552			108,688		103,373

Total assets			2,226,084			2,171,452			2,104,637			2,055,641		2,006,712

Long-term obligations (including amounts due within one year)		$	606,800		$	626,800		$	626,800		$	646,800	$	646,800

			Increase (Decrease) From Prior Period
			Electric Revenues						Gas Revenues
Cause			Electric Revenues						Gas Revenues
Cause			2000			1999			2000			1999
Retail sales:
	Fuel and gas supply adjustments, etc.		$	(9,027	)	$	(2,014	)	$	57,156		$	(24,791	)
	Merger surcredit			(2,331	)		(4,194	)		—			—
	Performance based rate			4,114			(6,076	)		—			—
	Demand side management/decoupling			6			(2,985	)		(20	)		(6,462	)
	Environmental cost recovery surcharge			(1,308	)		(570	)		—			—
	Electric rate reduction			(20,727	)		—			—			—
	Gas rate increase			—			—			4,221			—
	Variation in sales volumes			5,753			22,009			23,596			17,779

		Total retail sales		(23,520	)		6,170			84,953			(13,474	)
Wholesale sales				(56,256	)		121,996			9,226			(602	)
Gas transportation-net				—			—			572			(575	)
Other				829			1,228			159			685

		Total	$	(78,947	)	$	129,394		$	94,910		$	(13,966	)

	Moody's	S&P	Fitch
First mortgage bonds	A1	A-	AA-
Unsecured debt	A2	BBB	A+
Preferred Stock Dividends ..................... 4,568 4,585 4,568 ----------------------------------- Net Income Available for Common Stock ......... $ 73,552 $ 108,688 $ 103,373 ----------------------------------- ----------------------------------- stock	a2	BBB-	A
Commercial paper	P-1	A-2	F-1

			December 31
			2000		1999
ASSETS:
Utility plant, at original cost (Note 1):
	Electric		$	2,459,206	$	2,396,707
	Gas			389,371		365,128
	Common			148,530		141,009

				2,997,107		2,902,844
	Less: reserve for depreciation			1,296,865		1,215,032

				1,700,242		1,687,812
	Construction work in progress			189,218		162,995

				1,889,460		1,850,807

Other property and investments—less reserve				1,357		1,224
Current assets:
	Cash and temporary cash investments			2,495		54,761
	Marketable securities (Note 6)			4,056		6,936
	Accounts receivable—less reserve of $1,286 in 2000 and $1,233 in 1999			170,852		113,859
	Materials and supplies—at average cost:
		Fuel (predominantly coal)		9,325		17,350
		Gas stored underground		54,441		38,780
		Other		31,685		35,010
	Prepayments and other			1,317		2,775

				274,171		269,471

Deferred debits and other assets:
	Unamortized debt expense			5,784		5,607
	Regulatory assets (Note 3)			36,808		31,443
	Other			18,504		12,900

				61,096		49,950

			$	2,226,084	$	2,171,452

CAPITAL AND LIABILITIES:
Capitalization (see statements of capitalization):
	Common equity		$	778,928	$	683,376
	Cumulative preferred stock			95,140		95,328
	Long-term debt (Note 10)			360,600		380,600

				1,234,668		1,159,304

Current liabilities:
	Current portion of long-term debt (Note 10)			246,200		246,200
	Notes payable (Note 11)			114,589		120,097
	Accounts payable			134,392		113,008
	Provision for rate refunds			2,500		8,962
	Dividends declared			1,367		24,236
	Accrued taxes			8,073		23,759
	Accrued interest			6,350		9,265
	Other			15,826		15,725

				529,297		561,252

Deferred credits and other liabilities:
	Accumulated deferred income taxes (Notes 1 and 8)			289,232		255,910
	Investment tax credit, in process of amortization			62,979		67,253
	Accumulated provision for pensions and related benefits (Note 7)			31,257		38,431
	Customers' advances for construction			9,578		11,104
	Regulatory liabilities (Note 3)			55,152		58,726
	Other			13,921		19,472

				462,119		450,896

Commitments and contingencies (Note 12)			$	2,226,084	$	2,171,452

			December 31
			2000			1999
COMMON EQUITY:
	Common stock, without par value—
		Authorized 75,000,000 shares, outstanding 21,294,223 shares	$	425,170		$	425,170
	Common stock expense			(836	)		(836	)
	Additional paid-in capital			40,000			—
	Unrealized loss on marketable securities, net of income taxes ($128) in 1999 (Note 6)			—			(189	)
	Retained earnings			314,594			259,231

				778,928			683,376

CUMULATIVE PREFERRED STOCK:
	Redeemable on 30 days notice by LG&E

		Shares Outstanding	Current Redemption Price
$25 par value, 1,720,000 shares authorized—
	5% series	860,287	$	28.00	21,507		21,507
Without par value, 6,750,000 shares authorized—
	Auction rate	500,000		100.00	50,000		50,000
	$5.875 series	250,000		103.53	25,000		25,000
Preferred stock expense					(1,367	)	(1,179	)

					95,140		95,328

LONG-TERM DEBT (Note 10):
	First mortgage bonds—
		Series due July 1, 2002, 7¹/2%				—		20,000
		Series due August 15, 2003, 6%				42,600		42,600
		Pollution control series:
			P due June 15, 2015, 7.45%			—		25,000
			Q due November 1, 2020, 7⁵/8%			—		83,335
			R due November 1, 2020, 6.55%			41,665		41,665
			S due September 1, 2017, variable			31,000		31,000
			T due September 1, 2017, variable			60,000		60,000
			U due August 15, 2013, variable			35,200		35,200
			V due August 15, 2019, 5⁵/8%			102,000		102,000
			W due October 15, 2020, 5.45%			26,000		26,000
			X due April 15, 2023, 5.90%			40,000		40,000
			Y due May 1, 2027, variable			25,000		—
			Z due August 1, 2030, variable			83,335		—

				Total first mortgage bonds		486,800		506,800
	Pollution control bonds (unsecured)—
		Series due September 1, 2026, variable				22,500		22,500
		Series due September 1, 2026, variable				27,500		27,500
		Series due November 1, 2027, variable				35,000		35,000
		Series due November 1, 2027, variable				35,000		35,000

				Total unsecured pollution control bonds		120,000		120,000

		Total bonds outstanding				606,800		626,800
		Less current portion of long-term debt				246,200		246,200

		Long-term debt				360,600		380,600

		Total capitalization			$	1,234,668	$	1,159,304

	2000			1999
Unamortized loss on bonds	$	19,036		$	16,556
Merger costs		9,073			12,702
Manufactured gas sites		2,368			2,185
One utility costs		6,331			—

Total regulatory assets		36,808			31,443

Deferred income taxes—net		(54,593	)		(56,767	)
Deferred net gain		(559	)		(1,959	)

Total regulatory liabilities		(55,152	)		(58,726	)

Regulatory liabilities—net	$	(18,344	)	$	(27,283	)

		2000					1999
		Cost		Fair Value			Cost		Fair Value
Marketable securities		$	4,403	$	4,056		$	7,253	$	6,936
Long-term investments—
	Not practicable to estimate fair value		564		564			746		746
Preferred stock subject to mandatory redemption			25,000		25,275			25,000		24,861
Long-term debt (including current portion)			606,800		606,236			626,800		623,498
U.S. Treasury note and bond futures			—		—			—		81
Interest-rate swaps			—		(5,998	)		—		1,666

		2000			1999			1998
Pension Plans:
Change in benefit obligation
	Benefit obligation at beginning of year	$	283,267		$	311,935		$	274,095
	Service cost		3,408			5,005			6,333
	Interest cost		22,698			21,014			19,873
	Plan amendments		17,042			(2,397	)		3,724
	Curtailment (gain) or loss		—			—			(2,218	)
	Special termination benefits		—			—			18,295
	Benefits paid		(16,656	)		(15,471	)		(10,866	)
	Actuarial (gain) or loss and other		1,063			(36,819	)		2,699

	Benefit obligation at end of year	$	310,822		$	283,267		$	311,935

Change in plan assets
	Fair value of plan assets at beginning of year	$	360,095		$	308,660		$	280,238
	Actual return on plan assets		(6,150	)		51,995			38,913
	Employer contributions and plan transfers		(1,804	)		16,142			375
	Benefits paid		(16,656	)		(15,471	)		(10,866	)
	Administrative expenses		(2,107	)		(1,231	)		—

	Fair value of plan assets at end of year	$	333,378		$	360,095		$	308,660

Reconciliation of funded status
	Funded status	$	22,556		$	76,828		$	(3,275	)
	Unrecognized actuarial (gain) or loss		(74,086	)		(126,554	)		(72,037	)
	Unrecognized transition (asset) or obligation		(5,853	)		(6,965	)		(8,076	)
	Unrecognized prior service cost		47,984			35,588			41,447

	Net amount recognized at end of year	$	(9,399	)	$	(21,103	)	$	(41,941	)

		2000			1999			1998
Other Benefits:
Change in benefit obligation
	Benefit obligation at beginning of year	$	44,997		$	44,964		$	43,373
	Service cost		822			1,205			761
	Interest cost		4,225			3,270			2,946
	Plan amendments		5,826			2,377			599
	Curtailment (gain) or loss		—			—			344
	Special termination benefits		—			—			2,855
	Benefits paid		(4,889	)		(3,050	)		(2,634	)
	Actuarial (gain) or loss		6,000			(3,769	)		(3,280	)

	Benefit obligation at end of year	$	56,981		$	44,997		$	44,964

Change in plan assets
	Fair value of plan assets at beginning of year	$	10,526		$	6,062		$	4,384
	Actual return on plan assets		(92	)		1,776			199
	Employer contributions		1,621			4,681			3,207
	Benefits paid		(4,889	)		(1,993	)		(1,728	)

	Fair value of plan assets at end of year	$	7,166		$	10,526		$	6,062

Reconciliation of funded status
	Funded status	$	(49,815	)	$	(34,471	)	$	(38,902	)
	Unrecognized actuarial (gain) or loss		5,623			(1,638	)		(285	)
	Unrecognized transition (asset) or obligation		13,374			14,489			18,080
	Unrecognized prior service cost		8,960			4,292			3,519

	Net amount recognized at end of year	$	(21,858	)	$	(17,328	)	$	(17,588	)

		2000			1999			1998
Pension Plans:
Amounts recognized in the balance sheet consisted of:
	Prepaid benefits cost	$	18,880		$	6,466		$	—
	Accrued benefit liability		(28,279	)		(27,569	)		(41,977	)
	Intangible asset		—			—			36

	Net amount recognized at year-end	$	(9,399	)	$	(21,103	)	$	(41,941	)

Additional year-end information for plans with accumulated benefit obligations in excess of plan assets (1):
	Projected benefit obligation	$	4,088		$	4,845		$	148,005
	Accumulated benefit obligation		3,501			4,327			131,430
	Fair value of plan assets		—			—			107,988

		2000			1999			1998
Pension Plans:
Components of net periodic benefit cost
	Service cost	$	3,408		$	5,005		$	6,333
	Interest cost		22,698			21,014			19,873
	Expected return on plan assets		(33,025	)		(28,946	)		(23,701	)
	Amortization of prior service cost		4,646			3,462			3,882
	Amortization of transition (asset) or obligation		(1,112	)		(1,112	)		(1,112	)
	Recognized actuarial (gain) or loss		(6,856	)		(2,621	)		(2,248	)

	Net periodic benefit cost	$	(10,241	)	$	(3,198	)	$	3,027

Special charges
	Curtailment gain	$	—		$	—		$	(2,168	)
	Prior service cost recognized		—			—			1,914
	Special termination benefits		—			—			18,295

	Total charges	$	—		$	—		$	18,041

Other Benefits:
Components of net periodic benefit cost
	Service cost	$	822		$	1,205		$	761
	Interest cost		4,225			3,270			2,946
	Expected return on plan assets		(683	)		(401	)		(296	)
	Amortization of prior service cost		1,158			473			367
	Amortization of transition (asset) or obligation		1,114			1,114			1,315
	Recognized actuarial gain		(485	)		(183	)		—

	Net periodic benefit cost	$	6,151		$	5,478		$	5,093

Special charges
	Curtailment loss	$	—		$	—		$	1,005
	Prior service cost recognized		—			—			124
	Special termination benefits		—			—			2,855

	Total charges	$	—		$	—		$	3,984

		2000		1999		1998
Weighted-average assumptions as of December 31:
	Discount rate	7.75	%	8.00	%	7.00	%
	Expected long-term rate of return on plan assets	9.50	%	9.50	%	8.50	%
	Rate of compensation increase	4.75	%	5.00	%	3.50	%-4.00%

		1% Decrease			1% Increase
Effect on total of service and interest cost components for 2000		$	(246	)	$	279
Effect on year-end 2000 postretirement benefit obligations			(1,781	)		2,009

				2000			1999			1998
Included in operating expenses:
	Current		—federal	$	32,612		$	53,981		$	45,716
			—state		5,018			13,680			11,895
	Deferred		—federal—net		24,272			(4,818	)		2,276
			—state—net		6,797			(780	)		678
	Deferred investment tax credit				—			—			55
	Amortization of investment tax credit				(4,274	)		(4,289	)		(4,313	)

		Total			64,425			57,774			56,307

Included in other income—net:
	Current		—federal		(2,187	)		217			660
			—federal—merger costs		—			—			(6,758	)
			—state		(568	)		(30	)		6
			—state—merger costs		—			—			(1,737	)
	Deferred		—federal—net		(39	)		254			(165	)
			—state—net		(10	)		65			(42	)

		Total			(2,804	)		506			(8,036	)

Total income tax expense				$	61,621		$	58,280		$	48,271

		2000		1999
Deferred tax liabilities:
	Depreciation and other plant-related items	$	329,836	$	321,889
	Other liabilities		22,621		5,324

			352,457		327,213

Deferred tax assets:
	Investment tax credit		25,444		27,145
	Income taxes due to customers		22,086		22,588
	Pension overfunding		5,595		2,193
	Accrued liabilities not currently deductible and other		10,100		19,377

			63,225		71,303

Net deferred income tax liability		$	289,232	$	255,910

	2000		1999		1998
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	4.3		5.1		5.5
Amortization of investment tax credit	(2.6	)	(2.8	)	(3.4	)
Nondeductible merger expenses	—		—		2.4
Other differences—net	(.9	)	(1.9	)	(1.3	)

Effective income tax rate	35.8	%	35.4	%	38.2	%

	2000		1999			1998
Interest and dividend income	$	3,103	$	4,086		$	4,245
Gains on fixed asset disposals		1,014		2,394			530
Income taxes and other		804		(2,339	)		(2,279	)
Income tax benefit on merger costs		—		—			8,495

Other income—net	$	4,921	$	4,141		$	10,991

		Stated Interest Rates		Weighted Average Interest Rate		Maturities		Principal Amounts
Noncurrent portion		Variable - 6.55%		5.49	%	2003 - 2030		$	360,600
Current portion (pollution control bonds)		Variable		4.74	%	2013 - 2027			246,200