SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission Registrant, State of Incorporation, IRS Employer
File Number Address, and Telephone Number Identification No.
2-26720 Louisville Gas and Electric Company 61-0264150
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32010
Louisville, Ky. 40232
(502) 627-2000
1-3464 Kentucky Utilities Company 61-0247570
(A Kentucky and Virginia Corporation)
One Quality Street
Lexington, Kentucky 40507-1428
(859) 255-2100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X. No __.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Louisville Gas and Electric Company
21,294,223 shares, without par value, as of October 31, 2001,
all held by LG&E Energy Corp.
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Kentucky Utilities Company
37,817,878 shares, without par value, as of October 31, 2001,
all held by LG&E Energy Corp.
This combined Form 10-Q is separately filed by Louisville Gas and Electric
Company and Kentucky Utilities Company. Information contained herein
related to any individual registrant is filed by such registrant on its own
behalf. Each registrant makes no representation as to information relating
to the other registrants.
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TABLE OF CONTENTS
PART I
Item 1 Consolidated Financial Statements
Louisville Gas and Electric Company and Subsidiary
Statements of Income 1
Balance Sheets 2
Statements of Cash Flows 4
Statements of Retained Earnings 5
Statements of Other Comprehensive Income 6
Kentucky Utilities Company and Subsidiary
Statements of Income 7
Balance Sheets 8
Statements of Cash Flows 10
Statements of Retained Earnings 11
Statements of Other Comprehensive Income 12
Notes to Consolidated Financial Statements 13
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 20
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 28
PART II
Item 1 Legal Proceedings 29
Item 6 Exhibits and Reports on Form 8-K 29
Signatures 30
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Part I. Financial Information - Item 1. Financial Statements
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2000 2001 2000
OPERATING REVENUES:
Electric (Note 8) $206,228 $205,259 $557,891 $546,338
Gas(Note 8) 25,657 24,381 216,106 142,676
Total operating revenues 231,885 229,640 773,997 689,014
OPERATING EXPENSES:
Fuel for electric generation 44,338 41,854 124,571 120,430
Power purchased 15,566 23,907 59,651 70,006
Gas supply expenses 13,533 16,097 157,591 98,180
Non-recurring charges (Note 4) - - 144,385
8,141
Other operation expenses 39,441 31,620 111,122 99,142
Maintenance 13,680 14,804 37,918 46,127
Depreciation and amortization 26,344 25,119 77,183 73,169
Federal and state
income taxes 25,821 23,551 5,639 47,617
Property and other taxes 4,070 4,527 12,953 14,164
Total operating expenses 182,793 181,479 731,013 576,976
NET OPERATING INCOME 49,092 48,161 42,984 112,038
Other income - net 360 1,121 1,718 4,490
Interest charges (Note 5) 9,182 11,165 30,080 32,981
NET INCOME 40,270 38,117 14,622 83,547
Preferred stock dividends 1,110 1,361 3,628 3,843
NET INCOME AVAILABLE
FOR COMMON STOCK $ 39,160 $ 36,756 $ 10,994 $ 79,704
The accompanying notes are an integral part of these consolidated financial
statements.
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Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
Sept. 30, Dec. 31,
2001 2000
UTILITY PLANT:
At original cost $3,318,702 $3,186,325
Less: reserve for depreciation 1,363,649 1,296,865
Net utility plant 1,955,053 1,889,460
OTHER PROPERTY AND INVESTMENTS -
less reserve 1,181 1,357
CURRENT ASSETS:
Cash 826 2,495
Marketable securities - 4,056
Accounts receivable - less reserve (Note 6) 83,760 170,852
Materials and supplies - at average cost:
Fuel (predominantly coal) 13,688 9,325
Gas stored underground 51,065 54,441
Other 28,952 31,685
Prepayments and other 2,097 1,317
Total current assets 180,388 274,171
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,559 5,784
Regulatory assets (Note 9) 77,322 54,439
Other 290 873
Total deferred debits and other assets 83,171 61,096
Total assets $2,219,793 $2,226,084
The accompanying notes are an integral part of these consolidated financial
statements.
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Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
Sept. 30, Dec. 31,
2001 2000
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Additional paid-in capital 40,000 40,000
Retained earnings 325,588 314,594
Accumulated other comprehensive income (7,031) -
Other (836) (836)
Total common equity 782,891 778,928
Cumulative preferred stock 95,140 95,140
Long-term debt 370,704 360,600
Total capitalization 1,248,735 1,234,668
CURRENT LIABILITIES:
Current portion of long-term debt 246,200 246,200
Notes payable to parent 55,153 114,589
Accounts payable 70,887 136,892
Dividends declared 1,110 1,367
Accrued taxes 44,847 8,073
Accrued interest 4,420 6,350
Other 12,864 15,826
Total current liabilities 435,481 529,297
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 248,145 289,232
Investment tax credit, in
process of amortization 59,793 62,979
Accumulated provision for pensions
and related benefits (Note 4) 127,894 31,257
Customer advances for construction 9,729 9,578
Regulatory liabilities (Note 9) 70,251 61,013
Other 19,765 8,060
Total deferred credits and other liabilities 535,577 462,119
Total capital and liabilities $2,219,793 $2,226,084
The accompanying notes are an integral part of these consolidated financial
statements.
3
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Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Thousands of $)
Nine Months
Ended
Sept. 30,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,622 $ 83,547
Items not requiring cash currently:
Depreciation and amortization 77,183 73,169
Deferred income taxes - net (45,886) 22,907
Investment tax credit - net (3,186) (3,208)
Non-recurring charges (Note 4) 107,919 -
Other 11,977 5,899
Changes in current assets and liabilities 4,754 (20,070)
Sale of accounts receivable (Note 6) 37,900 -
Other (14,122) (9,221)
Net cash flows from operating activities 191,161 153,023
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities - (708)
Proceeds from sales of securities 4,231 3,594
Construction expenditures (143,844) (97,670)
Net cash flows from investing activities (139,613) (94,784)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of pollution control bonds 10,104 104,638
Retirement of pollution control bonds - (108,335)
Retirement of first mortgage bonds - (20,124)
Short-term borrowings 61,564 1,959,012
Repayment of short-term borrowings (121,000)(1,947,487)
Payment of dividends (3,885) (59,718)
Net cash flows from financing activities (53,217) (72,014)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (1,669) (13,775)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 2,495 54,761
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 826 $ 40,986
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 16,517 $ 17,641
Interest on borrowed money 25,554 35,903
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
4
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Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended September 30, Ended September
30,
2001 2000 2001 2000
Balance at beginning
of period $286,428 $269,179 $314,594 $259,231
Net income 40,270 38,117 14,622 83,547
Subtotal 326,698 307,296 329,216 342,778
Cash dividends declared on stock:
5% cumulative preferred 269 269 807 807
Auction rate cumulative
preferred 474 725 1,720 1,935
$5.875 cumulative preferred 367 367 1,101 1,101
Common - 17,000 - 50,000
Subtotal 1,110 18,361 3,628 53,843
Balance at end of period $325,588 $288,935 $325,588 $288,935
The accompanying notes are an integral part of these consolidated financial
statements.
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Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2000 2001 2000
Net income $40,270 $38,117 $14,622 $83,547
Cumulative effect of change in
Accounting principle - Accounting
For Derivative Instruments and
Hedging Activites (Note 5) - - (5,998) -
Losses on derivative instruments
and hedging activities (4,663) - (5,721) -
Unrealized holding gains(losses)on
available-for-sale securities
arising during the period - 113 - (153)
Other comprehensive income (loss),
before tax (4,663) 113 (11,719) (153)
Income tax benefit (expense)
related to items of other
comprehensive income (loss) 1,865 (45) 4,688 62
Other comprehensive income $37,472 $38,185 $ 7,591 $83,456
The accompanying notes are an integral part of these consolidated financial
statements.
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Kentucky Utilities Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2000 2001 2000
OPERATING REVENUES (Note 8) $216,370 $215,984 $647,522 $639,087
OPERATING EXPENSES:
Fuel for electric generation 65,646 56,012 177,096 163,093
Power purchased 31,139 39,880 116,046 122,188
Non-recurring charges (Note 4) - - 63,788
11,030
Other operation expenses 30,937 26,092 84,898 79,107
Maintenance 14,143 14,374 41,663 45,602
Depreciation and amortization 24,158 24,532 71,805 73,356
Federal and state
income taxes 16,236 14,119 21,606 36,854
Property and other taxes 3,857 3,814 12,289 13,031
Total operating expenses 186,116 178,823 589,191 544,261
NET OPERATING INCOME 30,254 37,161 58,331 94,826
Other income 1,284 1,322 5,698 5,301
Interest charges (Note 5) 5,198 10,000 23,740 29,938
NET INCOME before Cumulative
Effectof Accounting Change 26,340 28,483 40,289 70,189
Cumulative Effect of Change in
Accounting for Derivative
Instruments and Hedging
Activities, net of tax
(Note 5) - - 136 -
NET INCOME 26,340 28,483 40,425 70,189
Preferred stock dividends 564 564 1,692 1,692
NET INCOME AVAILABLE
FOR COMMON STOCK $ 25,776 $ 27,919 $ 38,733 $ 68,497
The accompanying notes are an integral part of these consolidated financial
statements.
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Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
Sept. 30, Dec. 31,
2001 2000
UTILITY PLANT:
At original cost $3,032,613 $2,932,763
Less: reserve for depreciation 1,443,677 1,378,283
Net utility plant 1,588,936 1,554,480
OTHER PROPERTY AND INVESTMENTS -
less reserve 9,754 14,538
CURRENT ASSETS:
Cash 184 314
Accounts receivable - less reserve (Note 6) 70,259 90,419
Materials and supplies - at average cost:
Fuel (predominantly coal) 31,189 12,495
Other 26,126 25,812
Prepayments and other 2,675 1,899
Total current assets 130,433 130,939
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4,400 4,651
Regulatory assets (Note 9) 19,605 26,441
Other 16,846 8,469
Total deferred debits and other assets 40,851 39,561
Total assets $1,769,974 $1,739,518
The accompanying notes are an integral part of these consolidated financial
statements.
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Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
Sept. 30, Dec. 31,
2001 2000
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Additional paid-in capital 15,000 15,000
Retained earnings 385,971 347,238
Accumulated other comprehensive income 1,589 -
Other (595) (595)
Total common equity 710,105 669,783
Cumulative preferred stock 40,000 40,000
Long-term debt 434,530 430,830
Total capitalization 1,184,635 1,140,613
CURRENT LIABILITIES:
Current portion of long-term debt 54,000 54,000
Notes payable to parent 24,290 61,239
Accounts payable 84,936 76,339
Dividends declared 188 188
Accrued taxes 28,455 19,622
Accrued interest 6,136 6,373
Other 17,788 18,579
Total current liabilities 215,793 236,340
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 218,196 246,680
Investment tax credit, in
process of amortization 12,316 14,901
Accumulated provision for pensions
and related benefits (Note 4) 88,173 47,495
Customer advances for construction 1,586 1,540
Regulatory liabilities (Note 9) 34,962 38,392
Other 14,313 13,557
Total deferred credits and other liabilities 369,546 362,565
Total capital and liabilities $1,769,974 $1,739,518
The accompanying notes are an integral part of these consolidated financial
statements.
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Kentucky Utilities Company and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Thousands of $)
Nine Months
Ended
September 30,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 40,425 $ 70,189
Items not requiring cash currently:
Depreciation and amortization 71,805 73,356
Deferred income taxes - net (31,980) (3,829)
Investment tax credit - net (2,585) (2,755)
Non-recurring charges (Note 4) 48,504 -
Other 5,489 6,186
Changes in current assets and liabilities (20,671) (1,836)
Sale of accounts receivable (Note 6) 30,000 -
Other (147) 31,513
Net cash flows from operating activities 140,840 172,824
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (102,329) (74,434)
Net cash flows from investing activities (102,329) (74,434)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings 348,963 159,256
Repayment of short-term borrowings (385,912) (129,313)
Issuance of pollution control bonds - 12,900
Retirement of pollution control bonds - (74,785)
Payment of dividends (1,692) (70,128)
Net cash flows from financing activities (38,641) (102,070)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (130) (3,680)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 314 6,793
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 184 $ 3,113
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 52,280 $ 26,544
Interest on borrowed money 23,017 25,417
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
10
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Kentucky Utilities Company and Subsidiary
Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
Balance at beginning
of period $360,195 $320,048 $347,238 $329,470
Net income 26,340 28,483 40,425 70,189
Subtotal 386,535 348,531 387,663 399,659
Cash dividends declared on
stock:
4.75% preferred 237 237 711 711
6.53% preferred 327 327 981 981
Common - 25,500 - 75,500
Subtotal 564 26,064 1,692 77,192
Balance at end of period $385,971 $322,467 $385,971 $322,467
The accompanying notes are an integral part of these consolidated financial
statements.
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Kentucky Utilities Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2000 2001 2000
Net income $26,340 $28,483 $40,425 $70,189
Cumulative effect of change in
accounting principle-Accounting
for Derivative Instruments and
Hedging activities (Note 5) - - 2,647 -
Other comprehensive income, before tax - - 2,647 -
Income tax (expense) related to items
of other comprehensive income - - (1,058) -
Other comprehensive income $26,340 $28,483 $42,014 $70,189
The accompanying notes are an integral part of these consolidated financial
statements.
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Louisville Gas and Electric Company and Subsidiary
Kentucky Utilities Company and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. The unaudited consolidated financial statements include the accounts of
Louisville Gas and Electric Company and Subsidiary and Kentucky
Utilities Company and Subsidiary ("LG&E" and "U" or the "Companies").
The common stock of each of LG&E and KU is wholly owned by LG&E Energy
Corp. ("LG&E Energy"). In the opinion of management, all adjustments,
including those of a normal recurring nature, have been made to present
fairly the consolidated financial position, results of operations,
comprehensive income and cash flows for the periods indicated. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to SEC rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading.
Certain reclassification entries have been made to the 2000 financial
statements to conform to the 2001 presentation with no impact on the
balance sheet totals or previously reported income.
See LG&E's and KU's Reports on Form 10-K for 2000 for information
relevant to the accompanying financial statements, including
information as to the significant accounting policies of the Companies.
2. Effective December 11, 2000, LG&E Energy was acquired by Powergen plc
("Powergen"). LG&E Energy had announced on February 28, 2000 the offer to
be acquired by Powergen for cash of approximately $3.2 billion or $24.85
per share and the assumption of all of LG&E Energy's debt. Pursuant to the
acquisition agreement, among other things, LG&E Energy became a wholly
owned subsidiary of Powergen and, as a result, LG&E and KU became indirect
subsidiaries of Powergen. The utility operations (LG&E and KU) of LG&E
Energy have continued their separate identities and continue to serve
customers in Kentucky and Virginia under their existing names. The
preferred stock and debt securities of the utility operations were not
affected by this transaction and the utilities continue to file SEC
reports. Following the acquisition, Powergen became a registered holding
company under Public Utility Holding Company Act of 1935 ("PUHCA"), and
LG&E and KU, as subsidiaries of a registered holding company, became
subject to additional regulation under PUHCA.
As a result of the Powergen acquisition and in order to comply with
PUHCA, LG&E Energy Services Inc. ("LG&E Services") was formed and
became operational on January 1, 2001. LG&E Services provides certain
services to affiliated entities, including LG&E and KU, at cost, as
required under PUHCA. On January 1, 2001, approximately 1,000
employees, primarily from LG&E Energy, LG&E and KU, were moved to LG&E
Services.
3. On April 9, 2001, a German power company, E.ON AG ("E.ON"),
announced a pre-conditional cash offer of 5.1 billion pounds sterling
($7.3 billion) for Powergen. The offer is subject to a number of conditions,
including the receipt of certain European and United States regulatory
approvals. The Kentucky Public Service Commission, the Federal Regulatory
Energy Commission ("FERC"), the Virginia State Corporation Commission, and
the Tennessee Regulatory Authority have all approved the acquisition of
Powergen and LG&E Energy by E.ON. The parties expect to obtain the
remaining regulatory approvals by early 2002 and they expect to complete
the transaction in the spring of 2002. See Powergen's schedule 14D-9, and
associated schedules to such filing, filed with the Securities and Exchange
Commission on April 9, 2001.
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4. During the first quarter 2001, the Companies took a $124.1 million
after tax charge (LG&E $86.1 million, and KU $38 million) for a
workforce reduction program. Primary components of the charges were
separation benefits, enhanced early retirement benefits, and health
care benefits. The result of this workforce reduction was the
elimination of approximately 1,000 positions, accomplished primarily
through the Companies' voluntary enhanced severance program. During the
first quarter 2000, the Companies' took an $11.4 million after-tax
charge for the continued integration of the operations of LG&E and KU
including their customer service centers and retail electric and gas
operations. The result of this consolidation was the elimination of
approximately 400 positions, accomplished primarily through the
Companies' voluntary enhanced severance program.
On June 1, 2001, LG&E and KU filed an application (VDT case) with the
Kentucky Commission to create regulatory assets totaling $144 million
(pretax) for LG&E ($114.5 million and $29.5 million attributable to the
electric and gas businesses, respectively) and $56 million (pretax) for
KU relating to these first quarter 2001 charges. The application seeks
to amortize these costs over a four-year period. If the application
were granted, the allowed portion of the non-recurring charges would be
reversed through the income statement to create the regulatory assets.
The Kentucky Commission has opened cases to review the new depreciation
studies and resulting depreciation rates implemented by the Companies
in 2001. Procedural hearings are to be held in December 2001 with a
ruling expected in early 2002.
LG&E and KU have reached a settlement in the VDT case as well as the
other cases involving depreciation rates and earnings sharing
mechanisms with all intervening parties. The settlement agreement has
been filed with the Kentucky Public Service Commission for approval. If
the settlement is not approved, management expects to proceed with
hearings in the VDT and depreciation cases scheduled for December with
the Kentucky Commission. Rulings resulting from the December hearings
would be expected in early 2002.
In October 2001, the Kentucky Public Service Commission issued an order
extending LG&E's gas supply cost Performance-Based Ratemaking (PBR)
mechanism for an additional four years. The Kentucky Commission
approved LG&E's request for its sale of storage services in the off-
system market at market-based rates. The Kentucky Commission denied
the cost recovery mechanism proposed by LG&E for the development of
additional underground gas storage deliverability. The Kentucky
Commission altered the current 50/50 sharing of savings or expenses
produced under the current mechanism to a sliding scale starting at
25/75 company/customer sharing.
5. SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded on the balance sheet as either an
asset or a liability measured at its fair value. SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and
requires that LG&E and KU must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133
could increase the volatility in earnings and other comprehensive income.
LG&E and KU adopted SFAS No. 133 on January 1, 2001. The effect of this
statement was a charge to LG&E of $3.6 million and a credit to KU of $1.6
million applied to cumulative effect of change in accounting principle (net
of tax) in other comprehensive income.
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of its debt instruments. Pursuant to Company
policy, use of these financial instruments is intended to mitigate risk
and earnings volatility and is not speculative in nature. Management
has designated all of the Companies' interest rate swaps as hedge
instruments. Financial instruments designated as cash flow hedges have
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resulting gains and losses recorded within other comprehensive income
and stockholders' equity. To the extent a financial instrument or the
underlying item being hedged is prematurely terminated or the hedge
becomes ineffective, the resulting gains or losses are reclassified
from other comprehensive income to net income. Financial instruments
designated as fair value hedges are periodically marked to market with
the resulting gains and losses recorded directly into net income to
correspond with income or expense recognized from changes in market
value of the items being hedged.
As of September 30, 2001, LG&E had fixed rate swaps covering
$117,335,000 in notional amounts of variable rate debt and with fixed
rates ranging from 4.184% to 5.495%. The average variable rate on the
debt during the quarter was 2.74%. The swaps have been designated as
cash flow hedges and expire on various dates from September 2003
through November 2020. The hedges were deemed to be fully effective
resulting in pretax loss for the quarter ended September 30, 2001 of
$4,663,000, and a pretax loss of $5,721,000 for the nine months ended
September 30, 2001, recorded in Other Comprehensive Income. Upon
expiration of these hedges, the amount recorded in Other Comprehensive
Income will be reclassified into earnings. The amount expected to be
reclassified from Other Comprehensive Income to earnings in the next
twelve months is immaterial.
As of September 30, 2001, KU had variable rate swaps covering
$153,000,000 in notional amounts of fixed rate debt. The average
variable rate on these swaps during the quarter was 4.02%. The
underlying debt has fixed rates ranging from 5.873% to 7.920%. The
swaps have been designated as fair value hedges and expire on various
dates from May 2007 through June 2025. During the quarter and nine
months ended September 30, 2001, the effect of marking these financial
instruments and the underlying debt to market resulted in pretax gains
of $2,639,000 and $2,861,000, respectively, recorded as a reduction in
interest expense.
6. SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, revises the standards for
accounting for securitizations and other transfers of financial assets
and collateral and requires certain disclosures, and provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The Companies
adopted SFAS No. 140 in the first quarter of 2001, when LG&E and KU
entered into an accounts receivable securitization transaction.
On February 6, 2001, LG&E and KU each sold accounts receivables to two
wholly-owned subsidiaries, LG&E Receivables LLC ("LGE-R") and KU
Receivables LLC ("KU-R"), respectively. Simultaneously, LGE-R and KU-R
entered into two separate three-year accounts receivables
securitization facilities with two financial institutions and their
affiliates whereby LGE-R and KU-R can sell, on a revolving basis, an
undivided interest in certain of their receivables and receive up to
$75 million and $50 million, respectively, from an unrelated third
party purchaser at a cost of funds linked to commercial paper rates
plus a charge for administrative and credit support services.
Furthermore, LG&E and KU retain the servicing rights of the sold
receivables through two separate servicing agreements between the third
party purchaser and each utility. Under these agreements, LG&E and KU
receive a fee for servicing the sold receivables on behalf of the third
party purchaser. As of September 30, 2001, LG&E's outstanding program
balance was $37.9 million and KU's balance was $30.0 million.
The allowance for doubtful accounts associated with the eligible
securitized receivables was $1.0 million for LG&E and $.4 million for
KU at September 30, 2001. Charge offs were immaterial for LG&E and KU.
The risk of uncollectibility associated with the sold receivables is
minimal. Moreover, each securitization facility contains a fully
funded reserve for uncollectible receivables.
7. In October 2000, LG&E and KU each filed an application with the
Kentucky Commission to amend their respective Environmental Compliance
Plans to reflect the addition of Nitrogen Oxide ("NOx") reduction
technology projects and to amend their respective Environmental Cost
Recovery Tariffs ("ECR") to include an overall rate of return on
capital investments. The NOx reduction technology is anticipated to
15
<page>
allow LG&E and KU to meet new Environmental Protection Agency NOx
requirements that take effect in 2003-2004. The Kentucky Commission
issued an order on April 18, 2001, that approved the amended
environmental compliance plan and the use of an overall rate of return,
including an 11.5% return on equity, effective May 1, 2001. Costs
associated with the amended compliance plan may be recovered by the
Companies as incurred, subject to review and approval by the Kentucky
Commission in periodic regulatory reviews.
8. External and intersegment revenues (related parties transactions
between LG&E and KU) and income by business segment for the three
months ended September 30, 2001, follow (in thousands of $):
16
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Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common
LG&E electric $199,740 $ 6,488 $ 41,139
LG&E gas 25,657 - (1,979)
Total $225,397 $ 6,488 $ 39,160
KU electric $208,263 $ 8,107 $ 25,776
External and intersegment revenues (related party transactions between
LG&E and KU) and income by business segment for the nine months ended
September 30, 2001, follow (in thousands of $):
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common
LG&E electric $ 535,574 $ 22,317 $ 24,564
LG&E gas 216,106 - (13,570)
Total $ 751,680 $ 22,317 $ 10,994
KU electric $ 623,873 $ 23,649 $ 38,733
External and intersegment revenues (related parties transactions
between LG&E and KU) and income by business segment for the three
months ended September 30, 2000, follow (in thousands of $):
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common
LG&E electric $ 200,560 $ 4,699 $ 38,904
LG&E gas 24,381 - (2,148)
Total $ 224,941 $ 4,699 $ 36,756
KU electric $211,640 $ 4,344 $ 27,919
17
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External and intersegment revenues (related parties transactions
between LG&E and KU) and income by business segment for the nine months
ended September 30, 2000, follow (in thousands of $):
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common
LG&E electric $531,099 $ 15,239 $ 81,981
LG&E gas 142,676 - (2,277)
Total $673,775 $ 15,239 $ 79,704
KU electric $623,597 $ 15,490 $ 68,497
9. The following regulatory assets and liabilities were included in the
balance sheet of LG&E and KU as of September 30, 2001 and December 31,
2000 (in thousands of $):
Louisville Gas and Electric
(Unaudited)
Sept. 30, Dec. 31,
2001 2000
REGULATORY ASSETS:
Unamortized loss on bonds $ 18,185 $ 19,036
Gas supply adjustments due from customers 37,026 12,324
LG&E/KU Merger costs 6,351 9,073
One utility costs 4,315 6,331
Manufactured gas sites 2,140 2,368
Other 9,305 5,307
Total 77,322 54,439
REGULATORY LIABILITIES:
Deferred income taxes - net 49,795 54,593
Gas supply adjustments due to customers 16,811 2,029
Other 3,645 4,391
Total $ 70,251 $ 61,013
Kentucky Utilities
(Unaudited)
Sept. 30, Dec. 31,
2001 2000
REGULATORY ASSETS:
Unamortized loss on bonds $ 6,359 $ 7,011
LG&E/KU Merger costs 7,162 10,232
One utility costs 5,515 8,273
Other 569 925
Total 19,605 26,441
REGULATORY LIABILITIES:
Deferred income taxes - net 33,987 37,484
Other 975 908
Total $ 34,962 $ 38,392
18
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10.Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets were
issued in the second quarter of 2001. SFAS No. 141 requires all
business combinations initiated after June 30, 2001, to be accounted
for using the purchase method. SFAS No. 142 requires goodwill to be
recorded, but not amortized. Further, goodwill will now be subject to a
periodic assessment for impairment. LG&E and KU have no recorded
goodwill and have no merger or acquisitions in progress. Therefore, the
provisions of these new pronouncements were effective July 1, 2001, for
LG&E and KU. Management does not expect adoption of these standards to
have a material impact on the results of operations or financial
position of LG&E or KU.
SFAS No. 143, Accounting for Asset Retirement Obligations was also
issued in the second quarter of 2001. SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, was issued in the third
quarter of 2001. SFAS No. 143 establishes accounting and reporting
standards for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No.
144 supersedes FASB No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of and the
accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS No. 144, among other
provisions, eliminates the requirement of Statement 121 to allocate
goodwill to long-lived assets to be tested for impairment. The
effective implementation date for these standards is 2002. The
Companies are currently analyzing the provisions of the statements and
cannot predict the impact these statements will have on operations and
financial position.
The Financial Accounting Standards Board created the Derivatives
Implementation Group (DIG) to provide guidance for implementation of
SFAS No. 133. DIG Issue C16, Applying the Normal Purchase and Normal
Sales Exception to Contracts that Combine a Forward Contract and a
Purchased Option Contract, was cleared in the third quarter 2001 and
stated that option contracts do not meet the normal purchases and
normal sales exception and should follow SFAS No. 133. DIG C16 will be
effective in the second quarter of 2002. LG&E and KU have not
determined what impact, if any, this DIG will have on their results of
operations and financial position.
11.On September 11, 2001 LG&E issued tax-exempt first mortgage bonds
totaling $10.1 million. The bonds bear interest at a variable rate
that resets weekly, and have a maturity date of September 1, 2027.
12.Reference is made to Part II, Legal Proceedings, below and Part I, Item
3, Legal Proceedings, of LG&E's and KU's Annual Reports on Form 10-K
for the year ended December 31, 2000.
19
<page>
Item 2. 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 and KU's financial results of
operations and financial condition during the three and nine months periods
described during 2001 and should be read in connection with the financial
statements and notes thereto.
Some of the following discussion may contain forward-looking statements
that are subject to certain risks, uncertainties and assumptions. Such
forward-looking statements are intended to be identified in this document
by the words "anticipate," "expect," "estimate," "objective," "possible,"
"potential" and similar expressions. Actual results may vary materially.
Factors that could cause actual results to differ materially include:
general economic conditions; business and competitive conditions in the
energy industry; changes in federal or state legislation; unusual weather;
actions by state or federal regulatory agencies; and other factors
described from time to time in LG&E's and KU's reports to the Securities
and Exchange Commission, including Exhibit No. 99.01 to the report on Form
10-K for year ended December 31, 2000.
Results of Operations
The results of operations for LG&E and KU are affected by seasonal
fluctuations in temperature and other weather-related factors. Because of
these and other factors, the results of one interim period are not
necessarily indicative of results or trends to be expected for the full
year.
Three Months Ended September 30, 2001, Compared to
Three Months Ended September 30, 2000
LG&E Results:
LG&E's net income increased $2.2 million (6%) for the quarter ended
September 30, 2001, as compared to the quarter ended September 30, 2000.
This increase is due to higher gas and electric revenues and lower
purchased power and gas supply expenses, partially offset by higher
operating and fuel for electric generation expenses.
A comparison of LG&E's revenues for the quarter ended September 30, 2001,
with the quarter ended September 30, 2000, reflects increases and
(decreases) which have been segregated by the following principal causes
(in thousands of $):
Electric Gas
Cause Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ (2,649) $ 3,550
Environmental cost recovery surcharge 381 -
Demand side management cost recovery (338) 60
Performance based rate 534 -
LG&E/KU Merger surcredit (569) -
Gas rate increase - 3,477
Variation in sales volume, etc. 9,768 (4,274)
Total retail sales 7,127 2,813
Wholesale sales (5,826) (1,521)
Gas transportation - net - (73)
Other (332) 57
Total $ 969 $ 1,276
20
<page>
Electric revenues increased primarily because of an increase in kWh sold to
retail customers due to the warmer weather experienced in the quarter ended
September 30, 2001; cooling degree days increased 15%. The electric retail
increase was partially offset by lower priced sales to wholesale customers.
Gas revenues increased primarily as a result of higher gas supply costs
billed to customers through the gas supply clause coupled with the effects
of a gas rate increase ordered by the Kentucky Commission in September
2000, partially offset by a decrease in volumes sold.
Fuel for electric generation and gas supply expenses comprise a large
segment of LG&E's total operating expenses. LG&E's electric and gas rates
contain a fuel adjustment clause and a gas supply clause, respectively,
whereby increases or decreases in the cost of fuel and gas supply may be
reflected in retail rates, subject to the approval of the Kentucky
Commission. Fuel for electric generation increased $2.5 million (6%) for
the quarter because of an increase in volume of generation ($1.7 million)
and an increase in the cost of coal burned ($.8 million). Gas supply
expenses decreased $2.6 million (16%) due to a decrease in net gas supply
cost ($.5 million), a decrease in the volume of retail gas delivered to the
distribution system ($.8 million), and decreased wholesale gas expenses
($1.3 million).
Power purchased decreased $8.3 million (35%) primarily because of a
decrease in brokered sales and a lower unit cost of the purchases.
Other operations expenses increased $7.8 million (25%) in 2001, as compared
to 2000, primarily as a result of increased outside services and pension
expense ($7.9 million). Outside services increased in part due to the
classification of expenses as a result of the formation of LG&E Services,
as required by the Securities and Exchange Commission to comply with PUHCA.
Maintenance expenses decreased $1.1 million (8%) in 2001 mainly due to
decreases in software and communication equipment maintenance ($2.3
million) partially offset by increases in gas and electric distribution
maintenance expense. Software and communication equipment maintenance
decreased in part due to a reclassification of maintenance expenses in 2000
to other operations expenses in 2001.
Depreciation and amortization increased $1.2 million (5%) due to an
increase in depreciable plant in service and slightly higher depreciation
rates. A depreciation study was completed in late 2000 with new
depreciation rates going into effect in 2001. The new rates, as compared to
rates in effect for 2000, are expected to increase LG&E's annual
depreciation expense by approximately $.9 million in 2001. The study is
currently under review by the Kentucky Commission. An order from the
Kentucky Commission could change the depreciation rates currently in place.
See Note 4 of Notes to Financial Statements.
Other income and deductions decreased $.8 million (68%) in 2001 primarily
due to lower interest income.
Variations in income tax expense are largely attributable to changes in pre-
tax income.
Interest charges decreased $2 million (18%) due to lower interest rates on
variable rate debt ($.8 million) and the retirement of short-term
borrowings ($2.3 million) partially offset by an increase in interest on
debt to parent company ($.6 million) and an increase in interest associated
with LG&E's accounts receivable securitization program ($.5 million).
KU Results:
KU's net income decreased $2.1 million (8%) for the quarter ended September
30, 2001, as compared to the quarter ended September 30, 2000. This
decrease was due primarily to higher operating expenses, partially offset
by decreased interest expense.
21
<page>
A comparison of KU's revenues for the quarter ended September 30, 2001,
with the quarter ended September 30, 2000, reflects increases and
(decreases) which have been segregated by the following principal causes
(in thousands of $):
Retail sales:
Fuel supply adjustments $ 1,031
Environmental cost recovery surcharge 1,702
Demand side management cost recovery 461
Performance based rate 387
LG&E/KU Merger surcredit (1,010)
Variation in sales volume, etc. 379
Total retail sales 2,950
Wholesale sales (2,280)
Other (284)
Total $ 386
Electric revenues increased primarily due to increased price of sales to
retail customers, partially offset by decreased wholesale revenues.
Fuel for electric generation comprises a large segment of KU's total
operating expenses. KU's electric rates contain a Fuel Adjustment Clause,
whereby increases or decreases in the cost of fuel are reflected in retail
rates, subject to the approval of the Kentucky Commission, the Virginia
State Corporation Commission, and the Federal Energy Regulatory Commission.
Fuel for electric generation increased $9.6 million (17%) for the quarter
due to a $8.2 million increase in the price of coal burned and by a $1.4
million increase in volume.
Power purchased decreased $8.7 million (22%) in 2001 primarily because of
decreased brokered sales and lower average unit cost of purchases.
Other operating expenses increased $4.8 million (19%) due to increased
outside services and pension expense. Outside services increased in part
due to the classification of expenses as a result of the formation of LG&E
Services, as required by the Securities and Exchange Commission to comply
with PUHCA.
Depreciation and amortization decreased $.4 million (2%) due to a decrease
in depreciation rates, partially offset by an increase in plant in service.
A depreciation study was completed in late 2000 with new depreciation rates
going into effect in 2001. The new rates, as compared to rates in effect
for 2000, are expected to decrease KU's annual depreciation expense by
approximately $6 million in 2001. The depreciation study is currently
being reviewed by the Kentucky Commission. An order from the Kentucky
Commission could change the depreciation rates currently in place. See
Note 4 of Notes to Financial Statements.
Variations in income tax expense are largely attributable to changes in
pretax income.
Interest charges decreased $4.8 million (48%) for the third quarter 2001 as
compared to the third quarter 2000 due to implementation of SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ($2.6 million,
see Note 5 of Notes to Financial Statements), lower interest rates on
variable rate debt ($1.4 million), the retirement of short-term borrowings
($.5 million), lower interest on debt to parent company ($.7 million)
partially offset by an increase in interest associated with KU's accounts
receivable securitization program ($.4 million).
22
<page>
Nine Months Ended September 30, 2001, Compared to
Nine Months Ended September 30, 2000
LG&E Results:
LG&E's net income decreased $68.9 million for the first nine months of
2001, as compared to the first nine months of 2000, primarily because of
the $86.1 million (net of tax) one-time charge for LG&E's workforce
reduction program taken during the first quarter 2001. LG&E recorded a $4.8
million (net of tax) one-time charge incurred in the first quarter of 2000
for LG&E's One-Utility Program. See Note 4 of Notes to Financial
Statements. Excluding these one-time charges, LG&E's net income would have
increased $12.4 million primarily due to increased electric and gas sales
and lower maintenance expenses partially offset by increased operation
expenses.
A comparison of LG&E's revenues for the nine months ended September 30,
2001, with the nine months ended September 30, 2000, excluding the reversal
of provisions for certain rate refunds of $1.8 million, reflects increases
and (decreases) which have been segregated by the following principal
causes (in thousands of $):
Electric Gas
Cause Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ (1,386) $ 88,855
Environmental cost recovery surcharge 315 -
Demand side management cost recovery 303 61
Performance based rate 2,809 -
Electric rate reduction (3,671) -
LG&E/KU Merger surcredit (2,206) -
Gas rate increase - 15,265
Weather normalization - (2,329)
Variation in sales volume, etc. 12,717 (16,756)
Total retail sales 8,881 85,096
Wholesale sales 4,975 (11,902)
Gas transportation - net - (411)
Other (459) 647
Total $ 13,397 $ 73,430
Electric revenues increased primarily because of an increase in kWh sold to
retail consumers due to a 14% increase in cooling degree days and increased
volumes sold to wholesale customers.
The electric rate reduction resulted from the Kentucky Commission's January
2000 PBR order reducing LG&E's base electric rates.
Gas revenues increased primarily as a result of higher gas supply costs
billed to customers through the gas supply clause coupled with the effects
of a gas rate increase ordered by the Kentucky Commission in September
2000, partially offset by a decrease in retail and wholesale sales volume.
Fuel for electric generation increased $4.1 million (3%) for the nine
months because of an increase in generation ($4.1 million).
Gas supply expenses increased $59.4 million (61%) due to an increase in net
gas purchase prices.
Power purchased decreased $10.4 million (15%) primarily because of a
decrease in brokered sales activities ($13.6 million), partially offset by
increased sales to other utilities of $3.2 million.
23
<page>
The increase in non-recurring charges of $136.2 million, $81.2 million
after tax, is due to the costs associated with LG&E's workforce reduction
program. See Note 4 of Notes to Financial Statements.
Other operation expenses increased $12 million (12%) primarily as a result
of increased outside services and pension expense ($12 million). Outside
services increased in part due to the classification of expenses as a
result of the formation of LG&E Services, as required by the Securities and
Exchange Commission to comply with PUHCA.
Maintenance expenses for the first nine months of 2001 decreased $8.2
million (18%) primarily due to decreases in scheduled outages at the Mill
Creek and the Cane Run generating stations ($2.8 million), and software and
communication equipment maintenance costs ($6.2 million). Software and
communication equipment maintenance decreased in part due to a
reclassification of maintenance expense charged in 2000 to other operation
expenses in 2001.
Depreciation and amortization increased $4 million (5%) due to an increase
in depreciable plant in service and slightly higher depreciation rates. A
depreciation study was completed in late 2000 with new depreciation rates
going into effect in 2001. The new rates, as compared to rates in effect
for 2000, are expected to increase LG&E's annual depreciation expense by
approximately $.9 million in 2001. The study is currently under review by
the Kentucky Public Service Commission. An order from the Kentucky
Commission could change the depreciation rates currently in place. See
Note 4 of Notes to Financial Statements.
Other income and deductions decreased $2.8 million (62%) primarily due to
lower interest income.
Interest charges decreased $2.8 million (8%) due to lower interest rates on
variable rate debt ($1.2 million) and the retirement of short-term
borrowings ($6.4 million) partially offset by an increase in interest on
debt to parent company ($2.3 million) and the increase in interest
associated with LG&E's accounts receivable securitization program ($2.5
million).
Variations in income tax expense are largely attributable to changes in pre-
tax income.
KU Results:
KU's net income decreased $29.8 million for the nine months ended September
30, 2001, as compared to the nine months ended September 30, 2001,
primarily due to the $38 million (net of tax) one-time charge for KU's
workforce reduction program taken during the first quarter 2001. KU
recorded a $6.6 million (net of tax) one-time charge in the first quarter
of 2000 for KU's One Utility program. Excluding the non-recurring charges
(described in Note 4 of the Notes to Financial Statements), net income
increased approximately $1.6 million, due largely to decreased maintenance
and interest expenses partially offset by increased operation expenses.
A comparison of KU's revenues for the nine months ended September 30, 2001,
with the nine months ended September 30, 2000, reflects increases and
(decreases) which have been segregated by the following principal causes
(in thousands of $):
Retail sales:
Fuel supply adjustments $ 5,189
Environmental cost recovery surcharge 1,212
Demand side management cost recovery 461
Performance based rate 2,119
LG&E/KU Merger surcredit (3,051)
Electric rate reduction (5,395)
Variation in sales volume, etc. 5,374
Total retail sales 5,909
Wholesale sales 2,268
Other 258
Total $ 8,435
24
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Electric revenues increased primarily because of an increase in kWh sold to
retail consumers due to warmer weather experienced this year, cooling
degree days increasing 17% and increases in the unit price of wholesale
sales partially offset by the electric rate reduction order by the Kentucky
Commission in January 2000.
Fuel for electric generation increased $14 million (9%) for the nine months
ended September 30, 2001 as compared to the comparable period of 2000, due
to a $13.4 million increase in the cost of coal burned and by a $.6 million
increase in volume burned.
Power purchased decreased $6.1 million (5%) in 2001 primarily due to a
decrease in the average unit price of purchases.
Non-recurring charges increased $52.8 million, $31.4 million after tax.
These costs are due to KU's workforce reduction program. See Note 4 of
Notes to Financial Statements.
Other operating expenses increased $5.8 million (7%) primarily as a result
of increased outside services and pension expense ($7.4 million). Outside
services increased in part due to the classification of expenses as a
result of the formation of LG&E Services, as required by the Securities and
Exchange Commission to comply with PUHCA.
Maintenance expenses decreased $3.9 million (9%) due to decreases in steam
expenses, primarily resulting from repairs during a scheduled outage at the
Ghent steam plant during 2000.
Depreciation and amortization decreased $1.6 million (2%) due to a decrease
in depreciation rates partially offset by increased plant in service. A
depreciation study was completed in late 2000 with new depreciation rates
going into effect in 2001. The new rates, as compared to rates in effect
for 2000, are expected to decrease KU's annual depreciation expenses by
approximately $6 million in 2001. The depreciation study is currently
being reviewed by the Kentucky Public Service Commission. An order from
the Kentucky Commission could change the depreciation rates currently in
place. See Note 4 of Notes to Financial Statements.
Property and other taxes decreased $.7 million (6%) in 2001 primarily due
to decreases in payroll taxes as a result of KU's workforce reductions.
Variations in income tax expense are largely attributable to changes in
pretax income.
Interest charges decreased $6.2 million (21%) in 2001 as compared to the
2000 due to implementation of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities ($2.9 million, see Note 5 of Notes to
Financial Statements), lower interest rates on variable rate debt ($3.8
million), the retirement of short-term borrowings ($.7 million), lower
interest on debt to parent company ($1 million) partially offset by an
increase in interest associated with KU's accounts receivable
securitization program ($1.8 million).
Liquidity and Capital Resources
LG&E's and KU's need for capital funds are largely related to the
construction of plant and equipment necessary to meet the needs of electric
and gas utility customers. Lines of credit and commercial paper programs
are maintained to fund short-term capital requirements.
25
<page>
Construction expenditures for the nine months ended September 30, 2001, of
$144 million for LG&E and $102 million for KU, primarily for the purchase
of two jointly owned combustion turbines and construction to meet NOx
emission standards, were financed with internally generated funds, accounts
receivable securitization program and a $10.1 million bond issue at LG&E.
Also, no common dividends have been paid by LG&E or KU for the nine months
ended September 30, 2001. See Note 6 of Notes to Financial Statements
concerning accounts receivable securitization.
LG&E's and KU's combined cash and temporary cash investment balance
increased $1 million (LG&E $.8 million, KU $.2 million) during the nine
months ended September 30, 2001. The increase reflects cash flows from
operations and sale of accounts receivables, partially offset by
construction expenditures and debt repayments.
Variations in accounts receivable, accounts payable and materials and
supplies are generally not significant indicators of LG&E's and KU's
liquidity. Such variations are primarily attributable to fluctuations in
weather, which have a direct effect on sales of electricity and natural
gas. The decreases in accounts receivable resulted mainly from seasonal
fluctuations and the accounts receivable securitization program started at
LG&E and KU. See Note 6 of Notes to Financial Statements. The increase in
fuel resulted from seasonal fluctuations at LG&E and KU, and the decrease
in LG&E's gas stored underground resulted from seasonal fluctuations.
At September 30, 2001, unused capacity under LG&E's lines of credit totaled
$200 million. Such line of credit expired in November 2001. LG&E will rely
upon parent company Powergen plc for short-term liquidity needs for a short
period of time until the facility is replaced. KU had no committed lines
of credit at September 30, 2001.
On September 11, 2001, LG&E issued tax-exempt first mortgage bonds totaling
$10.1 million. The bonds bear interest at a variable rate that resets
weekly, and have a final maturity date of September 1, 2027.
LG&E's security ratings as of September 30, 2001, were:
Moody's S&P Fitch
First mortgage bonds A1 A- A+
Unsecured debt A2 BBB A
Preferred stock a2 BBB- A-
Commercial paper P-1 A-2 F-1
KU's security ratings as of September 30, 2001, were:
Moody's S&P Fitch
First mortgage bonds A1 A- A+
Preferred stock a2 BBB- A-
Commercial paper P-1 A-2 F-1
The Moody's and S&P's ratings of LG&E's and KU's debt securities are on
Credit Watch for upgrade as the result of the E.ON bid. Fitch has placed
LG&E and KU on credit watch evolving following the E.ON bid. These ratings
reflect the views of Moody's, S&P and Fitch. A security rating is not a
recommendation to buy, sell or hold securities and is subject to revision
or withdrawal at any time by the rating agency.
LG&E's capitalization ratios at September 30, 2001, and December 31, 2000,
follow:
26
<page>
Sept. 30, Dec. 31,
2001 2000
Long-term debt (including current portion) 39.8% 38.0%
Notes payable 3.6 7.2
Preferred stock 6.1 6.0
Common equity 50.5 48.8
Total 100.0% 100.0%
KU's capitalization ratios at September 30, 2001, and December 31, 2000,
follow:
Sept. 30, Dec. 31,
2001 2000
Long-term debt (including current portion) 38.7% 38.6%
Notes payable 1.9 4.9
Preferred stock 3.2 3.2
Common equity 56.2 53.3
Total 100.0% 100.0%
27
<page>
Statements of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets were issued
in the second quarter of 2001. SFAS No. 141 requires all business
combinations initiated after June 30, 2001, to be accounted for using the
purchase method. SFAS No. 142 requires goodwill to be recorded, but not
amortized. Further, goodwill will now be subject to a periodic assessment
for impairment. LG&E and KU have no recorded goodwill and have no merger or
acquisitions in progress. Therefore, the provisions of these new
pronouncements were effective July 1, 2001, for LG&E and KU. Management
does not expect adoption of these standards to have a material impact on
the results of operations or financial position of LG&E or KU.
SFAS No. 143, Accounting for Asset Retirement Obligations was also issued
in the second quarter of 2001. SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, was issued in the third quarter of 2001.
SFAS No. 143 establishes accounting and reporting standards for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 144 supersedes FASB No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS No. 144, among other
provisions, eliminates the requirement of Statement 121 to allocate
goodwill to long-lived assets to be tested for impairment. The effective
implementation date for these standards is 2002. The Companies are
currently analyzing the provisions of the statements and cannot predict the
impact these statements will have on operations and financial position.
The Financial Accounting Standards Board created the Derivatives
Implementation Group (DIG) to provide guidance for implementation of SFAS
No. 133. DIG Issue C16, Applying the Normal Purchase and Normal Sales
Exception to Contracts that Combine a Forward Contract and a Purchased
Option Contract, was cleared in the third quarter 2001 and stated that
option contracts do not meet the normal purchases and normal sales
exception and should follow SFAS No. 133. DIG C16 will become effective in
the second quarter of 2002. LG&E and KU have not determined what impact,
if any, this DIG issue will have on their results of operations and
financial position.
For a description of significant contingencies that may affect LG&E and KU,
reference is made to Part I, Item 3, Legal Proceedings of LG&E's and KU's
Annual Reports on form 10-K
For the year ended December 31, 2000 and to Part II herein - Item 1, Legal
Proceedings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
LG&E and KU are exposed to market risks. Both operations are exposed to
market risks from changes in interest rates and commodity prices. To
mitigate changes in cash flows attributable to these exposures, the
Companies have entered into various derivative instruments. Derivative
positions are monitored using techniques that include market value and
sensitivity analysis.
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The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of its debt instruments. Pursuant to Company
policy, use of these financial instruments is intended to mitigate risk and
earnings volatility and is not speculative in nature. Management has
designated all of the Companies' interest rate swaps as hedge instruments.
Financial instruments designated as cash flow hedges have resulting gains
and losses recorded within other comprehensive income and stockholders'
equity. To the extent a financial instrument or the underlying item being
hedged is prematurely terminated or the hedge becomes ineffective, the
resulting gains or losses are reclassified from other comprehensive income
to net income. Financial instruments designated as fair value hedges are
periodically marked to market with the resulting gains and losses recorded
directly into net income to correspond with income or expense recognized
from changes in market value of the items being hedged.
The potential change in interest expense resulting from changes in base
interest rates of the Companies' unswapped debt did not change materially
in 2001. The potential changes in the fair values of the Company's
interest-rate swaps resulting from changes in interest rates and the yield
curve also did not change materially in 2001. The Company's exposure to
market risks from changes in commodity prices remained immaterial in 2001.
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Part II. Other Information
Item 1. Legal Proceedings.
For a description of the significant legal proceedings involving LG&E and
KU, reference is made to the information under the following items and
captions of LG&E's and KU's respective combined Annual Report on Form 10-K
for the year ended December 31, 2000: Item 1, Business; Item 3, Legal
Proceedings; Item 7, Management's Discussion and Analysis of Results of
Operations and Financial Condition; Notes 3 and 12 of LG&E's Notes to
Financial Statements under Item 8 and Notes 3 and 11 of KU's Notes to
Financial Statements under Item 8. Except as described herein, to date,
the proceedings reported in LG&E's and KU's respective combined Annual
Report on Form 10-K have not changed materially.
E.On - Powergen Transaction
On April 9, 2001, E.On AG announced a conditional offer to purchase all the
common shares of Powergen plc, the indirect corporate parent of LG&E and
KU. The transaction is subject to a number of conditions precedent,
including the receipt of regulatory approvals from European and United
States governmental bodies, in form satisfactory to the parties. Among the
primary United States regulatory approvals are: the Kentucky Public Service
Commission, the Virginia State Corporation Commission, the Securities and
Exchange Commission, and the Federal Energy Regulatory Commission. The
parties anticipate that these 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.
Regulatory orders approving the E.ON transaction were received from the
Kentucky Commission on August 6, 2001, from the Virginia State Corporation
Commission on October 5, 2001, and the Federal Energy Regulatory Commission
on October 11, 2001. On October 23, 2001, the Tennessee Regulatory
Authority voted in an open hearing to approve the transaction with an
affirmative order anticipated shortly.
Item 6(a). Exhibits.
None.
Item 6(b). Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Louisville Gas and Electric Company
Registrant
Date: November 14, 2001 /s/ S. Bradford Rives
S. Bradford Rives
Senior Vice President - Finance and
Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kentucky Utilities Company
Registrant
Date: November 14, 2001 /s/ S. Bradford Rives
S. Bradford Rives
Senior Vice President - Finance and
Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
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