UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Or
[_] TRANSITION REPORT PURSUANT 1TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission Registrant, State of Incorporation IRS Employer
File Number Address, and Telephone Number Identification No.
1-2893 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, KY 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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Louisville Gas and Electric Company
21,294,223 shares, without par value, as of April 30, 2004,
all held by LG&E Energy LLC
Kentucky Utilities Company
37,817,878 shares, without par value, as of April 30, 2004,
all held by LG&E Energy LLC
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 related
to the other registrants.
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TABLE OF CONTENTS
PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LOUISVILLE GAS AND ELECTRIC COMPANY AND SUBSIDIARY
STATEMENTS OF INCOME 1
STATEMENT OF RETAINED EARNINGS 1
BALANCE SHEETS 2
STATEMENT OF CASH FLOWS 4
STATEMENTS OF OTHER COMPREHENSIVE INCOME 5
KENTUCKY UTILITIES COMPANY AND SUBSIDIARY
STATEMENTS OF INCOME 6
STATEMENT OF RETAINED EARNINGS 6
BALANCE SHEETS 7
STATEMENT OF CASH FLOWS 9
STATEMENTS OF OTHER COMPREHENSIVE INCOME 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. 19
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 28
ITEM 4 CONTROLS AND PROCEDURES. 30
PART II
ITEM 1 LEGAL PROCEEDINGS. 31
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 31
SIGNATURES 33
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Part I. Financial Information - Item 1. Consolidated Financial Statements
(Unaudited)
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months Ended
March 31,
2004 2003
OPERATING REVENUES (Note 5):
Electric $198,249 $187,020
Gas 163,714 139,824
Total operating revenues 361,963 326,844
OPERATING EXPENSES:
Fuel for electric generation 52,524 49,477
Power purchased 28,888 24,128
Gas supply expenses 130,756 106,107
Other operation expenses 58,061 53,528
Maintenance 11,541 11,893
Depreciation and amortization 27,499 27,145
Federal and state income taxes 15,025 16,641
Property and other taxes 5,071 4,735
Total operating expenses 329,365 293,654
NET OPERATING INCOME 32,598 33,190
Other income (expense) - net (461) 1,060
Other income from affiliated company (Note 10) - 4
Interest expense (Note 3) 4,777 6,255
Interest expense to affiliated companies (Note 10) 3,141
735
NET INCOME $ 24,219 $ 27,264
Consolidated Statement of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Ended
March 31,
2004 2003
Balance at beginning of period $497,441 $409,319
Net income 24,219 27,264
Subtotal 521,660 436,583
Cash dividends declared on stock:
5% cumulative preferred 269 269
Auction rate cumulative preferred 187 300
$5.875 cumulative preferred - 367
Subtotal 456 936
Balance at end of period $521,204 $435,647
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
(Unaudited)
(Thousands of $)
ASSETS
March 31, December 31,
2004 2003
UTILITY PLANT:
At original cost $3,826,311 $3,804,183
Less: reserve for depreciation 1,339,855 1,319,768
Net utility plant (Note 7) 2,486,456 2,484,415
OTHER PROPERTY AND INVESTMENTS -
less reserve of $63 as of March 31, 2004
and December 31, 2003 507 611
CURRENT ASSETS:
Cash and cash equivalents 28,629 1,706
Accounts receivable -
less reserve of $3,515 as of March 31, 2004
and December 31, 2003 (Note 4) 128,986 84,585
Notes receivable from affiliated companies 6,600 -
Materials and supplies - at average cost:
Fuel (predominantly coal) 22,081 25,260
Gas stored underground 24,756 69,884
Other 25,583 24,971
Prepayments and other 4,661 5,281
Total current assets 241,296 211,687
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 8,718 8,468
Regulatory assets (Note 6) 122,534 142,772
Other 37,506 40,975
Total deferred debits and other assets 168,758 192,215
Total assets $2,897,017 $2,888,928
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
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
March 31, December 31,
2004 2003
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Common stock expense (836) (836)
Additional paid-in capital 40,000 40,000
Accumulated other comprehensive loss (41,743) (38,111)
Retained earnings 521,204 497,441
Total common equity 943,795 923,664
Cumulative preferred stock 70,425 70,140
Mandatorily redeemable preferred stock (Note 8) 22,500 22,500
Long-term debt (Note 9) 328,104 328,104
Long-term debt to affiliated company (Note 9) 225,000 200,000
Total capitalization 1,589,824 1,544,408
CURRENT LIABILITIES:
Current portion of mandatorily
redeemable preferred stock (Note 8) 1,250 1,250
Current portion of long-term debt 246,200 246,200
Current portion of long-term debt to
affiliated company (Note 9) 100,000 -
Notes payable to affiliated companies (Note 9) - 80,332
Accounts payable 72,171 93,118
Accounts payable to affiliated companies (Note 10) 19,875 38,343
Accrued taxes 23,617 18,615
Customer deposits 10,578 10,493
Other 10,519 9,308
Total current liabilities 484,210 497,659
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 338,843 337,704
Investment tax credit, in process of amortization 49,278 50,329
Accumulated provision for pensions
and related benefits 100,937 140,598
Customer advances for construction 10,020 9,890
Asset retirement obligation 9,911 9,747
Regulatory liabilities (Note 6):
Accumulated cost of removal of utility plant 227,187 223,622
Other 50,584 51,822
Long-term derivative liability 22,041 15,966
Other 14,182 7,183
Total deferred credits and other liabilities 822,983 846,861
Total capital and liabilities $2,897,017 $2,888,928
The accompanying notes are an integral part of these consolidated financial
statements.
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Louisville Gas and Electric Company and Subsidiary
Consolidated Statement of Cash Flows
(Unaudited)
(Thousands of $)
Three Months Ended
March 31,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,219 $ 27,264
Items not requiring cash currently:
Depreciation and amortization 27,499 27,145
Deferred income taxes - net 276 5,510
Investment tax credit - net (1,051) (1,052)
VDT amortization 7,534 7,696
Marked-to-market financial instruments 6,075 33
Other (2,992) 5,573
Changes in current assets and liabilities (29,225) 22,413
Changes in accounts receivable securitization
-net (Note 4) - 11,800
Pension funding (Note 9) (34,492) (83,125)
Provision for post-retirement benefits (5,169) (1,425)
Gas supply clause 7,773 (19,353)
Earnings sharing mechanism (ESM) 3,032 (1,147)
Other 12,864 4,122
Net cash flows from operating activities 16,343 5,454
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from sales of securities 103 162
Construction expenditures (27,061) (71,255)
Net cash flows used in investing activities (26,958) (71,093)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from
affiliated company (Note 9) 125,000 -
Short-term borrowings from
affiliated company (Note 9) 131,200 229,200
Repayment of short-term borrowings
from affiliated company (218,132) (173,741)
Issuance expense of pollution control bonds (96) -
Payment of dividends (434) (1,057)
Net cash flows from financing activities 37,538 54,402
CHANGE IN CASH AND CASH EQUIVALENTS 26,923 (11,237)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,706 17,015
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,629 $ 5,778
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 5,241 $ (1,739)
Interest on borrowed money $ 3,917 $ 6,700
Interest to affiliated companies
on borrowed money $ 2,777 $ 698
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 Ended
March 31,
2004 2003
Net income $24,219 $27,264
Losses on derivative instruments and hedging
activities - net of tax benefit/(expense) of
$2,417 and $13 for 2004 and 2003,
respectively (Note 3) (3,632) (20)
Other comprehensive loss, net of tax (3,632) (20)
Comprehensive income $20,587 $27,244
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 Ended
March 31,
2004 2003
OPERATING REVENUES (Note 5) $247,386 $224,983
OPERATING EXPENSES:
Fuel for electric generation 69,884 66,323
Power purchased 41,307 41,199
Other operation expenses 38,454 38,889
Maintenance 11,884
28,966
Depreciation and amortization 25,249 24,150
Federal and state income taxes 21,101 6,601
Property and other taxes 4,253 4,195
Total operating expenses 212,132 210,323
NET OPERATING INCOME 35,254 14,660
Other income - net 1,462 2,106
Other income from affiliated company (Note 10) 10 3
Interest expense (Note 3) 735 4,531
Interest expense to affiliated companies (Note 10) 3,547 377
NET INCOME $ 32,444 $ 11,861
Consolidated Statement of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Ended
March 31,
2004 2003
Balance at beginning of period $591,170 $502,024
Net income 32,444 11,861
Subtotal 623,614 513,885
Cash dividends declared on stock:
4.75% cumulative preferred 237 237
6.53% cumulative preferred 327 327
Subtotal 564 564
Balance at end of period $623,050 $513,321
The accompanying notes are an integral part of these consolidated financial
statements.
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Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
March 31, December 31,
2004 2003
UTILITY PLANT:
At original cost $3,612,033 $3,596,657
Less: reserve for depreciation 1,351,851 1,350,165
Net utility plant (Note 7) 2,260,182 2,246,492
OTHER PROPERTY AND INVESTMENTS -
less reserve of $131 and $130 as of March 31,
2004 and December 31, 2003, respectively 18,564 17,862
CURRENT ASSETS:
Cash and cash equivalents 8,072 4,869
Accounts receivable - less reserve of $673
and $672 as of March 31, 2004 and
December 31, 2003, respectively (Note 4) 83,596 49,289
Materials and supplies - at average cost:
Fuel (predominantly coal) 38,125 45,538
Other 27,235 27,094
Prepayments and other 13,045 13,100
Total current assets 170,073 139,890
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4,410 4,481
Regulatory assets (Note 6) 63,556 70,785
Long-term derivative asset 12,163 12,223
Other 18,499 23,449
Total deferred debits and other assets 98,628 110,938
Total assets $2,547,447 $2,515,182
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.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
March 31, December 31,
2004 2003
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Common stock expense (322) (322)
Additional paid-in capital 15,000 15,000
Accumulated other comprehensive loss (6,018) (6,031)
Retained earnings 623,050 591,170
Total common equity 939,850 907,957
Cumulative preferred stock 39,727 39,727
Long-term debt (Note 9) 312,027 312,646
Long-term debt to affiliated company (Note 9) 333,000 283,000
Total capitalization 1,624,604 1,543,330
CURRENT LIABILITIES:
Current portion of long-term debt 91,930 91,930
Notes payable to affiliated company (Note 9) 40,731 43,231
Accounts payable 53,545 69,947
Accounts payable to affiliated companies (Note 10) 9,601 26,426
Accrued taxes 24,198 8,809
Customer deposits 13,672 13,453
Other 14,521 11,654
Total current liabilities 248,198 265,450
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 267,908 261,258
Investment tax credit, in process of amortization 5,345 5,859
Accumulated provision for pensions and
related benefits 57,629 103,101
Customer advances for construction 1,576 1,564
Asset retirement obligation 20,023 19,698
Regulatory liabilities (Note 6):
Accumulated cost of removal of utility plant 269,127 266,832
Other 34,157 38,027
Other 18,880 10,063
Total deferred credits and other liabilities 674,645 706,402
Total capital and liabilities $2,547,447 $2,515,182
The accompanying notes are an integral part of these consolidated financial
statements.
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Kentucky Utilities Company and Subsidiary
Consolidated Statement of Cash Flows
(Unaudited)
(Thousands of $)
Three Months Ended
March 31,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32,444 $ 11,861
Items not requiring cash currently:
Depreciation and amortization 25,249 24,150
Deferred income taxes - net 6,022 913
Investment tax credit - net (513) (660)
VDT amortization 2,938 3,106
Marked-to-market financial instruments (560) 726
Other 842 14,324
Changes in current assets and liabilities (41,734) (6,371)
Pension funding (Note 9) (43,409) (3,503)
Provision for post-retirement benefits (2,062) (1,311)
ESM 3,318 3,010
Other 13,008 4,866
Net cash flows from operating activities (4,457) 51,111
CASH FLOWS USED IN INVESTING ACTIVITIES:
Long-term investments (702) (485)
Construction expenditures (38,582) (103,317)
Net cash flows used in investing activities (39,284) (103,802)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from
affiliated company (Note 9) 50,000 -
Short-term borrowings from
affiliated company (Note 9) 128,000 444,011
Repayment of short-term borrowings
from affiliated company (130,500) (388,970)
Refund on issuance expense of
pollution control bonds 8 -
Payment of dividends (564) (564)
Net cash flows from financing activities 46,944 54,477
CHANGE IN CASH AND CASH EQUIVALENTS 3,203 1,786
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,869 5,391
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,072 $ 7,177
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 966 $ (5,110)
Interest on borrowed money $ 1,577 $ 1,764
Interest to affiliated companies
on borrowed money $ 2,160 $ 366
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 Ended
March 31,
2004 2003
Net income $32,444 $11,861
Gains on derivative instruments and hedging
activities - net of tax benefit/(expense) of
$(13) for 2004 13 -
Other comprehensive income, net of tax 13 -
Comprehensive income $32,457 $11,861
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. General
The unaudited consolidated financial statements include the accounts of
Louisville Gas and Electric Company and Subsidiary and Kentucky
Utilities Company and Subsidiary (each "LG&E" and "KU", or the
"Companies"). The common stock of each of LG&E and KU is wholly-owned
by LG&E Energy LLC ("LG&E Energy"). In the opinion of management, the
unaudited interim financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
statement of consolidated financial position, results of operations,
comprehensive income and cash flows for the periods indicated. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Securities and
Exchange Commission ("SEC") rules and regulations, although the
Companies believe that the disclosures are adequate to make the
information presented not misleading.
See LG&E's and KU's Annual Reports on Form 10-K for the year ended
December 31, 2003, for information relevant to the accompanying
financial statements, including information as to the significant
accounting policies of the Companies.
The accompanying financial statements for the three months ended March
31, 2003, have been revised to conform to certain reclassifications in
the current three months ended March 31, 2004. These reclassifications
had no impact on the balance sheet net assets or net income, as
previously reported.
2. Mergers and Acquisitions
LG&E and KU are each subsidiaries of LG&E Energy. In July 2002, E.ON
AG ("E.ON"), a German company, completed its acquisition of Powergen
Limited ("Powergen"), the former parent company of LG&E Energy. As a
result, LG&E and KU became indirect subsidiaries of E.ON. E.ON had
announced its pre-conditional cash offer of 5.1 billion pounds sterling
($7.3 billion) for Powergen in April 2001.
Following the purchase of Powergen by E.ON, E.ON became a registered
holding company under the Public Utility Holding Company Act of 1935
("PUHCA"). As a result, E.ON, its utility subsidiaries, including LG&E
and KU, 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. LG&E and KU believe that they have adequate authority
(including financing authority) under existing SEC orders and
regulations to conduct their business. LG&E and KU will seek additional
authorization when necessary.
As contemplated in their regulatory filings in connection with the E.ON
acquisition, E.ON, Powergen and LG&E Energy completed an administrative
reorganization to move the LG&E Energy group from an indirect Powergen
subsidiary to an indirect E.ON subsidiary. This reorganization was
effective in March 2003. In early 2004, LG&E Energy began direct
reporting arrangements to E.ON.
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The utility operations (LG&E and KU) of LG&E Energy have continued
their separate identities and continue to serve customers in Kentucky,
Virginia and Tennessee under their existing names. The preferred stock
and debt securities of LG&E and KU were not affected by these
transactions and LG&E and KU continue to file SEC reports.
Effective December 30, 2003, LG&E Energy LLC became the successor, by
assignment and subsequent merger, to all the assets and liabilities of
LG&E Energy Corp. Following the conversion, LG&E Energy became a
registered holding company under PUHCA.
3. Financial Instruments
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to the
Companies' policies, use of these financial instruments is intended to
mitigate risk, earnings and cash flow 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 designated as a cash flow hedge 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 March 31, 2004, LG&E was party to various interest rate swap
agreements with aggregate notional amounts of $228.3 million. Under
these swap agreements, LG&E paid fixed rates averaging 4.38% and
received variable rates based on LIBOR or the Bond Market Association's
municipal swap index averaging 0.94% at March 31, 2004. The swap
agreements in effect at March 31, 2004 have been designated as cash
flow hedges and mature on dates ranging from 2005 to 2033. The hedges
have been deemed to be fully effective resulting in a pretax loss of
$6.1 million for the three months ended March 31, 2004, recorded in
other comprehensive income. Upon expiration of these hedges, the
amount recorded in other comprehensive income will be reclassified into
earnings. The amounts expected to be reclassified from other
comprehensive income to earnings in the next twelve months is
immaterial.
As of March 31, 2004, KU was party to various interest rate swap
agreements with aggregate notional amounts of $103 million. Under
these swap agreements, KU paid variable rates based on either LIBOR or
the Bond Market Association's municipal swap index averaging 2.09%, and
received fixed rates averaging 7.74% at March 31, 2004. The swap
agreements in effect at March 31, 2004 have been designated as fair
value hedges and mature on dates ranging from 2007 to 2025. For 2004,
the effect of marking these financial instruments and the underlying
debt to market resulted in immaterial pretax gains recorded in interest
expense.
Interest rate swaps hedge interest rate risk on the underlying debt.
Under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, in addition to swaps being marked to market, the item being
hedged using a fair value hedge must also be marked to market.
Consequently at March 31, 2004, KU's debt reflects a $14.1 million mark-
to-market adjustment.
In February 2004, KU terminated the swap it had in place related to
the Series 9 pollution control bonds. The notional amount of the
terminated swap was $50 million and KU received a payment of $2.0
million as part of the termination.
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4. Accounts Receivable Securitization Programs
In February 2001, LG&E and KU implemented accounts receivable
securitization programs. The purpose of these programs was to enable
LG&E and KU to accelerate the receipt of cash from the collection of
retail accounts receivable, thereby reducing dependence upon more
costly sources of working capital.
In January 2004, LG&E and KU terminated their accounts receivable
securitization programs and replaced them with intercompany loans from
an E.ON affiliate. LG&E and KU anticipate dissolving their inactive
accounts receivable securitization-related subsidiaries during 2004.
5. Segment of Business
LG&E's revenues and net income by business segment for the three months
ended March 31, 2004 and 2003, follow:
Three Months Ended March 31, 2004
(in thousands) Revenues Net Income
LG&E electric $198,249 $15,943
LG&E gas 163,714 8,276
Total $361,963 $24,219
Three Months Ended March 31, 2003
(in thousands) Revenues Net Income
LG&E electric $187,020 $18,051
LG&E gas 139,824 9,213
Total $326,844 $27,264
6. Regulatory Assets and Liabilities
The following regulatory assets and liabilities were included in
LG&E's balance sheets as of March 31, 2004 and December 31, 2003:
Louisville Gas and Electric
(Unaudited)
March 31, December 31,
(in thousands) 2004 2003
Value delivery team (VDT) costs $ 60,276 $ 67,810
Gas supply adjustments due
from customers 13,896 22,077
Unamortized loss on bonds 21,068 21,333
Earnings sharing mechanism
(ESM) provision 9,327 12,359
Merger surcredit 5,874 6,220
Manufactured gas sites 1,377 1,454
Asset retirement obligation (ARO) 6,209 6,015
Gas performance-based ratemaking (PBR) 4,502 5,480
Other 5 24
Total regulatory assets $ 122,534 $ 142,772
Accumulated cost of removal of
utility plant $(227,187) $(223,622)
Deferred income taxes - net (40,319) (41,180)
Gas supply adjustments due to customers (6,397) (6,805)
ARO (107) (85)
ESM provision (16) (79)
Environmental cost recovery (ECR) (1,076) (17)
Fuel adjustment clause (FAC) (210) (1,950)
Demand side management (DSM) (2,459) (1,706)
Total regulatory liabilities $(277,771) $(275,444)
LG&E currently earns a return on all regulatory assets except for gas
supply adjustments, ESM, gas performance-based ratemaking, and other,
- Page 13 -
all of which are separate rate mechanisms with recovery within twelve
months. Additionally, no current return is earned on the ARO
regulatory asset. This regulatory asset will be offset against the
associated regulatory liability, ARO asset, and ARO liability at the
time the underlying asset is retired.
The following regulatory assets and liabilities were included in KU's
balance sheets as of March 31, 2004 and December 31, 2003:
Kentucky Utilities
(Unaudited)
March 31, December 31,
(in thousands) 2004 2003
VDT costs $ 23,512 $ 26,451
Unamortized loss on bonds 10,309 10,511
ESM provision 9,064 12,382
FAC 3,305 4,298
Merger surcredit 4,547 4,815
ARO 11,692 11,322
Post-retirement and pension 1,127 1,006
Total regulatory assets $ 63,556 $ 70,785
Accumulated cost of removal of
utility plant $(269,127) $(266,832)
Deferred income taxes - net (23,430) (24,058)
ARO (1,225) (1,162)
Spare parts (1,064) (1,055)
ECR (6,604) (9,189)
FAC (134) (1,000)
DSM (1,700) (1,563)
Total regulatory liabilities $(303,284) $(304,859)
KU currently earns a return on all regulatory assets except for ESM and
FAC, all of which are separate recovery mechanisms with recovery within
twelve months. Additionally, no current return is earned on the ARO
regulatory asset. This regulatory asset will be offset against the
associated regulatory liability, ARO asset, and ARO liability at the
time the underlying asset is retired.
7. Utility Plant
KU retired two steam generating units, Green River Units 1 and 2, in
the amount of $17.2 million, from its books as of March 31, 2004.
Approximately $4 million in common assets, which are shared by Green
River Units 3 and 4, remain on KU's books. The common assets will
remain on KU's books until the final retirement of Green River Units 3
and 4.
The following data represents shares of jointly-owned additions to the
Trimble County plant for four combustion turbines as of March 31, 2004:
LG&E KU Total
Ownership % 37% 63% 100%
Mw capacity 237 403 640
Plant under construction ($mill) $73 $124 $197
Depreciation - - -
Net book value $73 $124 $197
- - Page 14 -
8. New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51 (FIN 46). FIN 46 requires certain variable interest entities to
be consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 was
effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46
must have been applied for the first interim or annual period beginning
after June 15, 2003.
In December 2003, FIN 46 was revised, delaying the effective dates for
certain entities created before February 1, 2003, and making other
amendments to clarify application of the guidance. For potential
variable interest entities other than special purpose entities, the
revised FIN 46 (FIN 46R) is now required to be applied no later than
the end of the first fiscal year or interim reporting period ending
after March 15, 2004. For all special purpose entities created prior
to February 1, 2003, FIN 46R is now required to be applied at the end
of the first interim or annual reporting period ending after December
15, 2003. FIN 46R may be applied prospectively with a cumulative-
effect adjustment as of the date it is first applied, or by restating
previously issued financial statements with a cumulative-effect
adjustment as of the beginning of the first year restated. FIN 46R
also requires certain disclosures of an entity's relationship with
variable interest entities.
Both LG&E and KU hold investment interests in the Ohio Valley Electric
Corporation ("OVEC"), and KU holds an investment interest in Electric
Energy, Inc. ("EEI"). Neither LG&E nor KU are the primary beneficiary
of OVEC or EEI, and thus neither are consolidated into the financial
statements of LG&E or KU.
LG&E, KU and ten other electric utilities are participating owners of
OVEC, located in Piketon, Ohio. OVEC owns and operates two power plants
that burn coal to generate electricity, Kyger Creek Station in Ohio and
Clifty Creek Station in Indiana. LG&E's share is 7%, representing
approximately 155 Mw of generation capacity and KU's share is 2.5%,
approximately 55 Mw of generation capacity.
LG&E's and KU's original investment in OVEC was made in 1952. LG&E's
investment in OVEC is the equivalent of 4.9% of OVEC's common stock and
KU's investment is the equivalent of 2.5% of OVEC's common stock.
LG&E's and KU's investment in OVEC is accounted for on the cost method
of accounting. As of March 31, 2004, LG&E's and KU's investment in OVEC
totaled $0.5 million and $0.3 million, respectively. LG&E's and KU's
maximum exposure to loss as a result of their involvement with OVEC is
limited to the value of their investment. In the event of the inability
of OVEC to fulfill its power provision requirements, LG&E and KU would
substitute such power supply with either owned generation or market
purchases and would recover any associated incremental costs through
regulatory rate mechanisms. See Part II, Item 1, for further
discussion of current legal proceedings regarding LG&E's and KU's
ownership interests and power purchase rights.
KU owns 20% of the common stock of EEI, which owns and operates a 1,000-
Mw generating station in southern Illinois. KU is entitled to take 20%
of the available capacity of the station. Purchases from EEI are made
under a contractual formula which has resulted in costs which were and
are expected to be comparable to the cost of other power purchased or
generated by KU. Such power equated to approximately 9% of KU's net
generation system output in 2003.
- - Page 15 -
KU's original investment in EEI was made in 1953. KU's investment in
EEI is accounted for on the equity method of accounting. As of March
31, 2004, KU's investment in EEI totaled $11.4 million. KU's maximum
exposure to loss as a result of its involvement with EEI is limited to
the value of its investment. In the event of the inability of EEI to
fulfill its power provision requirements, KU would substitute such
power supply with either owned generation or market purchases and would
recover any associated incremental costs through regulatory rate
mechanisms.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 was effective immediately for financial
instruments entered into or modified after May 31, 2003, and otherwise
was effective for interim reporting periods beginning after June 15,
2003.
LG&E has 237,500 shares of $5.875 series mandatorily redeemable
preferred stock outstanding having a current redemption price of $100
per share. The preferred stock has a sinking fund requirement
sufficient to retire a minimum of 12,500 shares on July 15 of each year
commencing with July 15, 2003, and the remaining 187,500 shares on July
15, 2008 at $100 per share. Beginning with the three months ended
September 30, 2003, LG&E reclassified its $5.875 series preferred stock
as long-term debt with the minimum shares mandatorily redeemable within
one year classified as current. Dividends accrued beginning July 1,
2003 are charged as interest expense.
KU has no financial instruments that fall within the scope of SFAS No.
150.
9. Short-Term and Long-Term Debt
Under the provisions for LG&E's variable-rate pollution control bonds,
Series S, T, U, BB, CC, DD and EE, and KU's variable-rate pollution
control bonds Series 10, 12, 13, 14, and 15, 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 in the
Consolidated Balance Sheets. The average annualized interest rate for
these bonds during the three months ending March 31, 2004 was 1.10% for
the LG&E bonds and 1.07% for the KU bonds.
In January 2004, LG&E entered into a long-term loan from Fidelia
Corporation ("Fidelia"), an E.ON financing subsidiary, totaling $25
million with an interest rate of 4.33% that matures in January 2012,
and a one-year loan totaling $100 million with an interest rate of
1.53%. The loans are secured by a lien subordinated to the first
mortgage bond lien. The proceeds were used to fund a pension
contribution and to repay other debt obligations. In April 2004, LG&E
prepaid $50 million of the $100 million 1.53% note payable to Fidelia.
The prepayment was paid out of cash balances and there was no
prepayment fee.
In January 2004, KU entered into an unsecured long-term loan from
Fidelia totaling $50 million with an interest rate of 4.39% that
matures in January 2012. The proceeds were used to fund a pension
contribution and to repay other debt obligations.
LG&E maintains five bilateral lines of credit totaling $185 million
that mature in 2004. There was no outstanding balance under these
facilities at March 31, 2004. Management expects to renew these
facilities as they expire.
LG&E and KU participate in an intercompany money pool agreement wherein
LG&E Energy and KU make funds available to LG&E at market-based rates
(based on an index of highly rated commercial paper issues as of the
prior month end) up to $400 million. Likewise, LG&E Energy and LG&E
- - Page 16 -
make funds available to KU at market-based rates up to $400 million.
LG&E had no money pool loan from LG&E Energy (shown as "Notes payable
to affiliate") at March 31, 2004, and had a balance of $248.5 million
at an average rate of 1.25% at March 31, 2003. The balance of the money
pool loans from LG&E Energy and LG&E to KU (shown as "Notes payable to
affiliate") was $40.7 million at an average rate of 0.98% and $174.5
million at an average rate of 1.25% at March 31, 2004 and 2003,
respectively. The amount available to LG&E under the money pool
agreement at March 31, 2004 was $400 million. The amount available to
KU under the money pool agreement at March 31, 2004 was $359.3 million.
LG&E Energy maintains a revolving credit facility totaling $150 million
with an affiliate to ensure funding availability for the money pool.
LG&E Energy had no outstanding balance under this facility as of March
31, 2004 and availability of $150 million remained.
10.Related Party Transactions
LG&E, KU, subsidiaries of LG&E Energy and other subsidiaries of E.ON
engage in related-party transactions. Prior to the termination of the
accounts receivable securitization programs at LG&E and KU in January
2004, transactions between LG&E and its accounts receivable subsidiary,
LG&E Receivables LLC ("LG&E R"), were eliminated upon consolidation
with LG&E. Transactions between KU and its accounts receivable
subsidiary, KU Receivables LLC ("KU R"), were eliminated upon
consolidation with KU. Transactions among LG&E, KU and LG&E Energy
subsidiaries are eliminated upon consolidation of LG&E Energy.
Transactions between LG&E or KU and E.ON subsidiaries are eliminated
upon consolidation of E.ON. These transactions are generally performed
at cost and are in accordance with the SEC regulations under the PUHCA
and the applicable Kentucky Public Service Commission ("Kentucky
Commission") regulations. Accounts payable to and receivable from
related parties are netted and presented as accounts payable to
affiliated companies on the balance sheets of LG&E and KU, as allowed
due to the right of offset. Obligations related to intercompany debt
arrangements with LG&E Energy and Fidelia are presented as separate
line items on the balance sheet, as appropriate. The significant
related-party transactions are disclosed below.
Electric Purchases
LG&E and KU intercompany electric revenues and purchased power expense
(including LG&E Energy Marketing Inc. ("LEM")) for the three months
ended March 31, 2004 and 2003 were as follows:
(in thousands) 2004 2003
LG&E
Electric operating revenues from KU $22,077 $16,969
Electric operating revenues from LEM 728 7,149
Purchased power from KU 21,585 14,464
KU
Electric operating revenues from LG&E $21,585 $14,464
Electric operating revenues from LEM 160 1,782
Purchased power from LG&E 22,077 16,969
Interest Charges
LG&E intercompany interest income and expense for the three months
ended March 31, 2004 and 2003 were as follows:
(in thousands) 2004 2003
Interest on money pool loans $ 48 $732
Interest on Fidelia loans 3,082 -
Interest expense paid to KU 10 3
Interest income received from KU - 4
KU intercompany interest income and expense for the three months ended
March 31, 2004 and 2003 were as follows:
(in thousands) 2004 2003
Interest on money pool loans $ 144 $373
Interest on Fidelia loans 3,403 -
Interest expense paid to LG&E - 4
Interest income received from LG&E 10 3
- - Page 17 -
Other Intercompany Billings
Other intercompany billings (including LG&E Energy Services Inc. ("LG&E
Services")) related to LG&E and KU for the three months ended March 31,
2004 and 2003 were as follows:
(in thousands) 2004 2003
LG&E Services billings to LG&E $38,161 $26,630
LG&E Services billing to KU 30,575 21,494
LG&E billings to LG&E Services 3,035 4,862
KU billings to LG&E Services 2,818 7,094
LG&E billings to KU 16,559 18,710
KU billings to LG&E 8,663 4,664
11.Commitments and Contingencies
In December 2003, LG&E and KU filed applications with the Kentucky
Commission requesting increases in LG&E's and KU's electric rates and
LG&E's gas rates. The Companies requested general adjustments in
electric rates and LG&E requested general adjustments in gas rates
based on the twelve-month test year ended September 30, 2003. The
revenue increases requested by LG&E were $63.8 million for electric and
$19.1 million for gas. The revenue increase requested by KU was $58.3
million. The Kentucky Commission has suspended the effective date of
the proposed new tariffs for five months, so that the rates may go into
effect subject to refund by July 1, 2004. The Kentucky Commission
established a procedural schedule for the cases pertaining to discovery
and hearings.
The Companies filed their final 2003 ESM calculations with the Kentucky
Commission on March 1, 2004, and applied for recovery of $16.2 million
related to KU and $13.0 million related to LG&E. Based upon estimates,
the Companies previously accrued $9.3 million at KU and $8.9 million at
LG&E for the 2003 ESM as of December 31, 2003. The Companies have not
booked or accrued to date the respective increases of $6.9 million and
$4.1 million, pending resolution of ongoing Kentucky Commission
proceedings regarding aspects of the ESM mechanism, including allowable
recoverable amounts. On March 31, 2004, the Kentucky Commission issued
orders consolidating the prior ESM cases into the general LG&E and KU
proceedings regarding increases in base rates.
During May 2004, the Kentucky Commission held hearings on the
applications for rate increases. On May 12, the Companies and all
intervenors filed a partial settlement agreement, stipulation and
recommendation with the Kentucky Commission providing for settlement of
all outstanding issues, except electric revenue requirements. All
intervenors except the Kentucky Attorney General entered a stipulation
on the electric revenue requirements. Testimony for the utilities and
the Attorney General was presented on electric revenues. All testimony
of all other intervenors and testimony of the Attorney General on other
issues was withdrawn. The agreement and stipulation provides for
increases in annual base electric rates of $43.4 million for LG&E and
$46.1 million for KU, and in annual gas rates of $11.9 million for LG&E
and provides for settlement of other issues such as various tariff
provisions, implementation of a pilot real-time pricing program,
implementation of a home energy assistance program and others. The
agreement provides that the rate increases would be effective
commencing July 1, 2004.
The Companies and the intervenors, including the Attorney General, also
filed proposed settlements regarding the ESM mechanisms of LG&E and KU.
Under the ESM settlements, LG&E and KU would continue to collect
approximately $13.0 million and $16.2 million, respectively, of
previously requested 2003 ESM revenue amounts through March 2005. As
part of the settlement, the parties agreed to a termination of the ESM
mechanism relating to all periods after 2003.
- - Page 18 -
The potential settlements are subject to Kentucky Commission approval.
Final Kentucky Commission orders in the rate case and related
proceedings, including the tendered settlements, are anticipated before
July 1, 2004. The Companies can provide no assurance regarding the
Commission's final decision regarding the partial agreement,
stipulation and recommendation of the parties or the ESM settlement.
Regulatory proceedings are also continuing concerning the Midwest
Independent Transmission System Operator ("MISO"). LG&E and KU
obtained membership in the MISO in 1998 in response to federal policy
initiatives. During March and April 2004, the Kentucky Commission held
hearings in the proceedings examining the cost and benefits of MISO
membership, including rate treatment of MISO costs and continued LG&E
and KU participation. A final order in the proceedings is anticipated
in mid-2004.
In the normal course of business, lawsuits, claims, environmental
actions, and various non-ratemaking governmental proceedings arise
against LG&E and KU. To the extent that damages are assessed in any of
these lawsuits, LG&E and KU believe that their insurance coverage or
other appropriate reserves are adequate. Management, after
consultation with legal counsel, and based upon the present status of
these items, does not anticipate that liabilities arising out of other
currently pending or threatened lawsuits and claims of the type
referenced above will have a material adverse effect on LG&E's or KU's
consolidated financial position or results of operations.
Except as discussed in this Quarterly Report on Form 10-Q, material
changes have not occurred in the current status of various commitments
or contingent liabilities from that discussed in the Companies' Annual
Report on Form 10-K for the year ended December 31, 2003 (including in
Notes 3 and 11 to the financial statements of LG&E and KU contained
therein and incorporated herein by reference).
12.Pension and Other Post-retirement Benefit Plans
The following table provides the components of net periodic benefit
cost for pension and other benefit plans for the three months ended
March 31, 2004:
(in thousands) LG&E KU
Pension and Other Benefit Plans:
Components of net period benefit cost
Service cost $ 2,088 $ 2,386
Interest cost 10,524 7,650
Expected return on plan assets (9,585) (6,909)
Amortization of prior service cost 2,003 583
Amortization of transition (asset)
or obligation (5) 319
Recognized actuarial (gain) or loss 1,105 839
$ 6,130 $ 4,868
In January 2004, LG&E and KU made discretionary contributions to their
pension plans in the amounts of $34.5 million and $43.4 million,
respectively. No contributions are required for 2004 for either LG&E
or KU and no further discretionary contributions are planned.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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 month period ended
March 31, 2004, and should be read in connection with the financial
statements and notes thereto.
- - Page 19 -
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 SEC,
including the Annual Reports on Form 10-K for the year ended December 31,
2003.
Executive Summary
LG&E's net income for the three months ended March 31, 2004 was $24.2
million ($3.0 million lower than the three months ended March 31, 2003).
The decrease was primarily related to higher operation expenses (MISO-
related costs and data conversion costs), somewhat offset by higher
wholesale electric revenues. Electric sales volumes increased due to higher
wholesale sales while gas volumes decreased due to milder weather. KU's
net income for the three months ended March 31, 2004 was $32.4 million
($20.6 million higher than the three months ended March 31, 2003). The
increase was primarily due to higher electric revenues in both the retail
and wholesale sectors and lower maintenance expense (KU experienced
unusually high maintenance costs in the first quarter of 2003 due to a
major ice storm).
As regulated utilities, LG&E and KU's financial performance is greatly
impacted by regulatory proceedings. In December 2003, LG&E and KU filed
applications with the Kentucky Commission requesting an adjustment in
LG&E's electric and gas rates and KU's electric rates. LG&E applied for
revenue increases of $63.8 million for electric and $19.1 million for gas.
KU applied for revenue increases of $58.3 million.
During May 2004, the Kentucky Commission held hearings on the applications
on rate increases. On May 12, the Companies and all intervenors filed a
partial settlement agreement, stipulation and recommendation with the
Kentucky Commission providing for settlement of all outstanding issues,
except electric revenue requirements. All intervenors except the Kentucky
Attorney General entered a stipulation on the electric revenue
requirements. Testimony for the utilities and the Attorney General was
presented on electric revenues. All testimony of all other intervenors and
testimony of the Attorney General on other issues was withdrawn. The
agreement and stipulation provides for increases in annual base electric
rates of $43.4 million for LG&E and $46.1 million for KU, and in annual gas
rates of $11.9 million for LG&E and provides for settlement of other issues
such as various tariff provisions, implementation of a pilot real-time
pricing program, implementation of a home energy assistance program and
others. The agreement provides that the rate increases would be effective
commencing July 1, 2004.
The Companies and the intervenors, including the Attorney General, also
filed proposed settlements regarding the ESM mechanisms of LG&E and KU.
Under the ESM settlements, LG&E and KU would continue to collect
approximately $13.0 million and $16.2 million, respectively, of previously
requested 2003 ESM revenue amounts through March 2005. As part of the
settlement, the parties agreed to a termination of the ESM mechanism
relating to all periods after 2003. Previously, on March 31, 2004, the
Kentucky Commission had issued orders consolidating the prior ESM cases
into the general LG&E and KU proceedings regarding increases in base rates.
The potential settlements are subject to Kentucky Commission approval.
Final Kentucky Commission orders in the rate case and related proceedings,
including the tendered settlements, are anticipated before July 1, 2004.
The Companies can provide no assurance regarding the Commission's final
decision regarding the partial agreement, stipulation and recommendation of
the parties or the ESM settlement.
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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 March 31, 2004, Compared to
Three Months Ended March 31, 2003
LG&E Results:
LG&E's net income decreased $3.0 million (11%) for the three months ended
March 31, 2004, as compared to the three months ended March 31, 2003,
primarily due to higher other operation expenses and higher interest
expenses, partially offset by higher electric revenues.
A comparison of LG&E's revenues for the three months ended March 31, 2004,
with the three months ended March 31, 2003, reflects increases and
(decreases) which have been segregated by the following principal causes:
Cause Electric Gas
(in thousands) Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ (2,805) $ 37,631
Environmental cost recovery surcharge 2,398 -
Earnings sharing mechanism 3,256 -
Demand side management cost recovery 184 (299)
LG&E/KU merger surcredit (472) -
Value delivery surcredit (181) -
Weather normalization - 2,686
Variation in sales volume and other (1,307) (16,468)
Total retail sales 1,073 23,550
Wholesale sales 12,116 755
Gas transportation - net - (69)
Provision for rate collections (refunds) (3,999) -
Other 2,039 (346)
Total $ 11,229 $ 23,890
Electric revenues increased $11.2 million primarily due to an increase in
wholesale sales volumes of 22%. Gas revenues increased $23.9 million
primarily as a result of increased gas prices billed to customers through
the gas supply clause, partially offset by 11% lower gas sales volumes
resulting from warmer weather as heating degree days declined 12.3% from
the previous year.
Fuel for electric generation and gas supply expenses comprise a large
component of LG&E's total operating expenses. LG&E's electric and gas
rates contain a fuel adjustment clause and a gas supply clause,
respectively, whereby increases or decreases in the cost of fuel and gas
supply are reflected in retail rates, subject to the approval of the
Kentucky Commission. Fuel for electric generation increased $3.0 million
(6%) for the three months ended March 31, 2004, due to 7% higher megawatt
hour ("MWH") generation resulting in a $3.4 million volume variance, offset
by 1% lower fuel costs per MWH, resulting in a ($0.4) million price
variance. Gas supply expenses increased $24.6 million (23%) due to 9%
higher gas prices per million cubic feet ("MCF"), resulting in a $37.0
million price variance, and $0.2 million in higher costs due to the impact
of the gas PBR mechanism, partially offset by 11% lower volumes, resulting
in a ($12.7) million volume variance.
- - Page 21 -
Power purchased increased $4.8 million (20%) due to 20% higher MWH
purchases, resulting in a $5.2 million volume variance. The cost per MWH
of purchased power decreased 1% resulting in a ($0.4) million price
variance.
Other operation expenses increased $4.5 million (9%) due primarily to
higher transmission expense of $3.1 million due to increased MISO expense
resulting from higher off-system sales and higher MISO administrative fees.
Electric distribution expense increased $1.4 million primarily due to data
conversion costs related to a distribution systems project.
Variances in income tax expense are largely attributable to changes in pre-
tax income.
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.6 5.6
Amortization of investment and other tax credits (2.7) (2.4)
Other differences (0.1) (0.4)
Effective income tax rate 37.8% 37.8%
In total, interest expense increased $0.9 million (13%) in 2004. Interest
expense decreased $1.5 million due to a $2.3 million decrease in interest
expense on long-term debt related to lower variable rates (including the
$102 million Series V and $26 million Series W pollution control bonds
which were refinanced from higher fixed rates to lower variable rates in
November 2003). This decrease was partially offset by an increase of $0.9
million primarily due to new interest rate swaps related to the refinancing
of Series V and W. Interest expense to affiliated companies increased $2.4
million due to $3.1 million related to new loans from Fidelia which were
only in effect for 2004, partially offset by a decrease of $0.7 million due
to lower borrowing levels from the money pool. The weighted average
interest rate on variable-rate bonds for the three months ended March 31,
2004, was 1.03%, compared to 1.22% for the comparable period in 2003.
In total, other income (expense) - net decreased $1.5 million (143%). Mark-
to-market income from energy trading contracts was $0.6 million lower in
2004 and other non-operating expense was $1.1 million higher, offset by
taxes $0.2 million lower.
KU Results:
KU's net income increased $20.6 million (174%) for the three months ended
March 31, 2004, as compared to the three months ended March 31, 2003. The
increase was primarily due to higher electric revenues and lower
maintenance expense.
A comparison of KU's revenues for the three months ended March 31, 2004,
with the three months ended March 31, 2003, reflects increases and
(decreases) which have been segregated by the following principal causes:
Cause Electric
(in thousands) Revenues
Retail sales:
Fuel supply adjustments $ 2,889
Environmental cost recovery surcharge 451
Earnings sharing mechanism 3,909
Demand side management cost recovery (243)
LG&E/KU merger surcredit (757)
Value delivery surcredit (79)
Variation in sales volume and other 2,510
Total retail sales 8,680
Wholesale sales 6,555
Provision for rate collections (refunds) 4,169
Other 2,999
Total $22,403
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Electric revenues increased $22.4 million primarily due to increased
wholesale prices and 12% higher volumes, increased billings for the
earnings sharing mechanism and fuel cost recovery, increased retail sales
volumes of 2% and an increase in the provision for rate collections.
Fuel for electric generation comprises a large component 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
("FERC"). Fuel for electric generation increased $3.6 million (5%) for the
three months ended March 31, 2004, due to 5% higher fuel costs per MWH,
resulting in a $0.3 million price variance, and 0.4% higher MWH generation,
resulting in a $3.3 million volume variance.
Power purchased increased $0.1 million (0.3%) due to 8% higher MWH
purchases, resulting in a $3.4 million volume variance, partially offset by
7% lower cost per MWH purchased, resulting in a ($3.3) million price
variance.
Maintenance expense decreased $17.1 million (59%). An ice storm in the KU
service territory in 2003 resulted in increased expenses of $15.9 million
for the three months ended March 31, 2003, for repairs to electric
distribution equipment. Steam maintenance expense was $2.6 million lower
in 2004 due to the timing of outages and other maintenance projects.
Variations in income tax expense are largely attributable to changes in
pretax income.
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.8 6.9
Amortization of investment and other tax credits (1.0) (3.7)
Other differences (1.6) (4.1)
Effective income tax rate 38.2% 34.1%
In total, other income - net decreased $0.6 million (30%) in 2004 primarily
due to lower mark-to-market income from energy trading contracts of $0.6
million and $1.0 million higher other non-operating expenses, partially
offset by a decrease in taxes ($0.6 million) and higher allowances for
funds used during construction ($0.3 million).
In total, interest expense decreased $0.6 million (13%) for the three
months ended March 31, 2004 as compared to the three months ended March 31,
2003. Interest expense to affiliated companies increased $3.4 million due
to loans from Fidelia, which were only in effect for 2004, partially offset
by a decrease of $0.2 million due to lower borrowing levels from the money
pool. Interest expense on other long-term debt decreased $1.8 million due
to a decrease in variable rates, and interest on interest rate swaps
decreased $1.6 million, primarily resulting from the February 2004
termination of a swap related to the Series 9 pollution control bonds. In
addition, interest decreased $0.2 million due to the termination of the
accounts receivable securitization program in January 2004. The weighted
average interest rate on variable-rate bonds for the three months ended
March 31, 2004, was 1.04% and the corresponding rate for the three months
ended March 31, 2003, was 1.17%.
Liquidity and Capital Resources
LG&E and KU's needs for capital funds are largely related to the
construction of plant and equipment necessary to meet the needs of electric
and gas utility customers. Internal and external lines of credit are
- - Page 23 -
maintained to fund short-term capital requirements. LG&E and KU believe
that such sources of funds will be sufficient to meet the needs of the
business in the foreseeable future.
Construction expenditures for the three months ended March 31, 2004 for
LG&E and KU amounted to $27.1 million and $38.6 million, respectively.
Such expenditures include construction to meet nitrogen oxide (NOx)
emission standards and the acquisition of combustion turbines to meet peak
power demands. Expenditures for the three months ended March 31, 2004, by
LG&E and KU for NOx construction were $1.8 million and $12.5 million,
respectively. Expenditures for the three months ended March 31, 2004, for
Trimble County combustion turbines, Units 7 through 10, by LG&E and KU were
$3.3 million and $5.6 million, respectively. The expenditures were
financed with internally generated funds and intercompany loans from
affiliates.
LG&E's cash balance increased $26.9 million during the three months ended
March 31, 2004, primarily due to increased borrowings from affiliated
companies, partially offset by pension funding and construction
expenditures. KU's cash balance increased $3.2 million during the three
months ended March 31, 2004. The increase reflects increased borrowings
from affiliated companies, partially offset by pension funding and
construction expenditures.
Variations in accounts receivable, accounts payable and materials and
supplies are generally not significant indicators of LG&E's and KU's
liquidity. Such variations are primarily attributable to seasonal
fluctuations in weather, which have a direct effect on sales of electricity
and natural gas. The increase in accounts receivable at LG&E and KU was
primarily due to the termination of the accounts receivable securitization
programs in January 2004, offset by the impact of decreased electric and
gas sales in March 2004 compared with December 2003. The decrease in
LG&E's gas stored underground relates to seasonal uses of gas. The
decrease in the fuel inventory at KU was due to lower purchases due to unit
outages. The decrease at LG&E was due to seasonal fluctuations.
Interest rate swaps are used to hedge LG&E's and KU's underlying variable-
rate debt obligations. These swaps hedge specific debt issuances and,
consistent with management's designation, are accorded hedge accounting
treatment. As of March 31, 2004, LG&E had swaps with a combined notional
value of $228.3 million and KU had swaps with a combined notional value of
$103 million. LG&E's swaps exchange floating-rate interest payments for
fixed rate interest payments to reduce the impact of interest rate changes
on LG&E's pollution control bonds. KU's swaps effectively convert fixed
rate obligations on KU's first mortgage bonds Series P and R to variable-
rate obligations.
In February 2004, KU terminated the swap it had in place at December 31,
2003 related to the Series 9 pollution control bonds. The notional amount
of the terminated swap was $50 million and KU received a payment of $2.0
million as part of the termination.
At March 31, 2004, LG&E's and KU's percentage of long-term debt having a
variable rate, including the impact of interest rate swaps, was 33.2% at
$306.0 million and 43.1% at $318.0 million, respectively.
Under the provisions for LG&E's variable-rate pollution control bonds,
Series S, T, U, BB, CC, DD and EE, and KU's variable-rate pollution control
bonds Series 10, 12, 13, 14, and 15, 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 in the Consolidated Balance Sheets.
The average annualized interest rate for these bonds during the three
months ending March 31, 2004 was 1.10% for the LG&E bonds and 1.07% for the
KU bonds.
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In January 2004, LG&E entered into a long-term loan with Fidelia totaling
$25 million with an interest rate of 4.33% that matures in January 2012,
and a one-year loan totaling $100 million with Fidelia. The interest rate
on the loan is 1.53%. The loans are secured by a lien subordinated to the
first mortgage bond lien. The proceeds were used to fund a pension
contribution and to repay other debt obligations. In April 2004, LG&E
prepaid $50 million of the $100 million 1.53% note payable to Fidelia. The
prepayment was paid out of cash balances and there was no prepayment fee.
In January 2004, KU entered into an unsecured long-term loan from Fidelia
totaling $50 million with an interest rate of 4.39% that matures in January
2012. The proceeds were used to fund a pension contribution and to repay
other debt obligations.
LG&E maintains five bilateral lines of credit totaling $185 million that
mature in 2004. There was no outstanding balance under these facilities at
March 31, 2004. Management expects to renew these facilities as they
expire.
LG&E and KU participate in an intercompany money pool agreement wherein
LG&E Energy and KU make funds available to LG&E at market-based rates
(based on an index of highly rated commercial paper issues as of the prior
month end) up to $400 million. Likewise, LG&E Energy and LG&E make funds
available to KU at market-based rates up to $400 million. LG&E had no
money pool loan from LG&E Energy (shown as "Notes payable to affiliate") at
March 31, 2004, and $248.5 million at an average rate of 1.25% at March 31,
2003. The balance of the money pool loans from LG&E Energy and LG&E to KU
(shown as "Notes payable to affiliate") was $40.7 million at an average
rate of .98% and $174.5 million at an average rate of 1.25% at March 31,
2004 and 2003, respectively. The amount available to LG&E under the money
pool agreement at March 31, 2004 was $400 million. The amount available to
KU under the money pool agreement at March 31, 2004 was $359.3 million.
LG&E Energy maintains a revolving credit facility totaling $150 million
with an affiliate to ensure funding availability for the money pool. LG&E
Energy had no outstanding balance under LG&E Energy's facility as of March
31, 2004 and availability of $150 million remained.
In January 2004, LG&E and KU made discretionary contributions to their
pension plans of $34.5 million and $43.4 million, respectively. No
contributions are required for 2004 and no further discretionary
contributions are planned.
LG&E's security ratings as of March 31, 2004, were:
Moody's S&P
First mortgage bonds A1 A-
Preferred stock Baa1 BBB-
Commercial paper P-1 A-2
KU's security ratings as of March 31, 2004, were:
Moody's S&P
First mortgage bonds A1 A
Preferred stock Baa1 BBB-
Commercial paper P-1 A-2
These ratings reflect the views of Moody's and S&P. 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.
- - Page 25 -
LG&E's capitalization ratios at March 31, 2004, and December 31, 2003,
follow:
March 31, December 31,
2004 2003
Long-term debt (including current portion) 30.9% 31.9%
Long-term debt to affiliated company
(including current portion) 16.8 10.7
Notes payable to affiliated companies - 4.3
Preferred stock 3.6 3.8
Common equity 48.7 49.3
Total 100.0% 100.0%
KU's capitalization ratios at March 31, 2004, and December 31, 2003,
follow:
March 31, December 31,
2004 2003
Long-term debt (including current portion) 23.0% 24.1%
Long-term debt to affiliated company
(including current portion) 18.9 16.8
Notes payable to affiliated companies 2.3 2.6
Preferred stock 2.3 2.4
Common equity 53.5 54.1
Total 100.0% 100.0%
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Board Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46).
FIN 46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN
46 was effective immediately for all new variable interest entities created
or acquired after January 31, 2003. For variable interest entities created
or acquired prior to February 1, 2003, the provisions of FIN 46 must have
been applied for the first interim or annual period beginning after June
15, 2003.
In December 2003, FIN 46 was revised, delaying the effective dates for
certain entities created before February 1, 2003, and making other
amendments to clarify application of the guidance. For potential variable
interest entities other than special purpose entities, the revised FIN 46
(FIN 46R) is now required to be applied no later than the end of the first
fiscal year or interim reporting period ending after March 15, 2004. For
all special purpose entities created prior to February 1, 2003, FIN 46R is
now required to be applied at the end of the first interim or annual
reporting period ending after December 15, 2003. FIN 46R may be applied
prospectively with a cumulative-effect adjustment as of the date it is
first applied, or by restating previously issued financial statements with
a cumulative-effect adjustment as of the beginning of the first year
restated. FIN 46R also requires certain disclosures of an entity's
relationship with variable interest entities.
Both LG&E and KU hold investment interests in OVEC and KU holds an
investment interest in EEI. Neither LG&E nor KU are the primary
beneficiary of OVEC or EEI, and thus neither are consolidated into the
financial statements of LG&E or KU.
LG&E, KU and ten other electric utilities are participating owners of OVEC,
located in Piketon, Ohio. OVEC owns and operates two power plants that burn
coal to generate electricity, Kyger Creek Station in Ohio and Clifty Creek
Station in Indiana. LG&E's share is 7%, representing approximately 155 Mw
of generation capacity and KU's share is 2.5%, approximately 55 Mw of
generation capacity.
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LG&E's and KU's original investment in OVEC was made in 1952. LG&E's
investment in OVEC is the equivalent of 4.9% of OVEC's common stock and
KU's investment is the equivalent of 2.5% of OVEC's common stock. LG&E's
and KU's investment in OVEC is accounted for on the cost method of
accounting. As of March 31, 2004, LG&E's and KU's investment in OVEC
totaled $0.5 million and $0.3 million, respectively. LG&E's and KU's
maximum exposure to loss as a result of their involvement with OVEC is
limited to the value of their investment. In the event of the inability of
OVEC to fulfill its power provision requirements, LG&E and KU would
substitute such power supply with either owned generation or market
purchases and would recover any associated incremental costs through
regulatory rate mechanisms. See Part II, Item 1, for further discussion of
current legal proceedings regarding LG&E's and KU's ownership interests and
power purchase rights.
KU owns 20% of the common stock of EEI, which owns and operates a 1,000-Mw
generating station in southern Illinois. KU is entitled to take 20% of the
available capacity of the station. Purchases from EEI are made under a
contractual formula which has resulted in costs which were and are expected
to be comparable to the cost of other power purchased or generated by KU.
Such power equated to approximately 9% of KU's net generation system output
in 2003.
KU's original investment in EEI was made in 1953. KU's investment in EEI
is accounted for on the equity method of accounting. As of March 31, 2004,
KU's investment in EEI totaled $11.4 million. KU's maximum exposure to
loss as a result of its involvement with EEI is limited to the value of its
investment. In the event of the inability of EEI to fulfill its power
provision requirements, KU would substitute such power supply with either
owned generation or market purchases and would recover any associated
incremental costs through regulatory rate mechanisms.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 was effective immediately for financial instruments entered into or
modified after May 31, 2003, and otherwise was effective for interim
reporting periods beginning after June 15, 2003.
LG&E has 237,500 shares of $5.875 series mandatorily redeemable preferred
stock outstanding having a current redemption price of $100 per share. The
preferred stock has a sinking fund requirement sufficient to retire a
minimum of 12,500 shares on July 15 of each year commencing with July 15,
2003, and the remaining 187,500 shares on July 15, 2008 at $100 per share.
Beginning with the three months ended September 30, 2003, LG&E reclassified
its $5.875 series preferred stock as long-term debt with the minimum shares
mandatorily redeemable within one year classified as current. Dividends
accrued beginning July 1, 2003 are charged as interest expense.
KU has no financial instruments that fall within the scope of SFAS No. 150.
Contingencies
For a description of significant contingencies that may affect LG&E and KU,
reference is made to Part I, Item 3, Legal Proceedings in LG&E's and KU's
Annual Reports on Form 10-K for the year ended December 31, 2003; and to
Part II - Item 1, Legal Proceedings herein.
Electric and Gas Rate Cases
In December 2003, LG&E and KU filed applications with the Kentucky
Commission requesting increases in LG&E's and KU's electric rates and
LG&E's gas rates. The Companies requested general adjustments in electric
rates and LG&E requested general adjustments in gas rates based on the
- - Page 27 -
twelve-month test year ended September 30, 2003. The revenue increases
requested by LG&E were $63.8 million for electric and $19.1 million for
gas. The revenue increase requested by KU was $58.3 million. The Kentucky
Commission has suspended the effective date of the proposed new tariffs for
five months, so that the rates may go into effect subject to refund by July
1, 2004. The Kentucky Commission established a procedural schedule for the
cases pertaining to discovery and hearings.
The Companies filed their final 2003 ESM calculations with the Kentucky
Commission on March 1, 2004, and applied for recovery of $16.2 million
related to KU and $13.0 million related to LG&E. Based upon estimates, the
Companies previously accrued $9.3 million at KU and $8.9 million at LG&E,
for the 2003 ESM as of December 31, 2003. The Companies have not booked
or accrued to date the respective increases of $6.9 million and $4.1
million, pending resolution of ongoing Kentucky Commission proceedings
regarding aspects of the ESM mechanism, including allowable recoverable
amounts. On March 31, 2004, the Kentucky Commission issued orders
consolidating the prior ESM cases into the general LG&E and KU proceedings
regarding increases in base rates.
During May 2004, the Kentucky Commission held hearings on the applications
for rate increases. On May 12, the Companies and all intervenors filed a
partial settlement agreement, stipulation and recommendation with the
Kentucky Commission providing for settlement of all outstanding issues,
except electric revenue requirements. All intervenors except the Kentucky
Attorney General entered a stipulation on the electric revenue
requirements. Testimony for the utilities and the Attorney General was
presented on electric revenues. All testimony of all other intervenors and
testimony of the Attorney General on other issues was withdrawn. The
agreement and stipulation provides for increases in annual base electric
rates of $43.4 million for LG&E and $46.1 million for KU, and in annual gas
rates of $11.9 million for LG&E and provides for settlement of other issues
such as various tariff provisions, implementation of a pilot real-time
pricing program, implementation of a home energy assistance program and
others. The agreement provides that the rate increases would be effective
commencing July 1, 2004.
The Companies and the intervenors, including the Attorney General, also
filed proposed settlements regarding the ESM mechanisms of LG&E and KU.
Under the ESM settlements, LG&E and KU would continue to collect
approximately $13.0 million and $16.2 million, respectively, of previously
requested 2003 ESM revenue amounts through March 2005. As part of the
settlement, the parties agreed to a termination of the ESM mechanism
relating to all periods after 2003.
The potential settlements are subject to Kentucky Commission approval.
Final Kentucky Commission orders in the rate case and related proceedings,
including the tendered settlements, are anticipated before July 1, 2004.
The Companies can provide no assurance regarding the Commission's final
decision regarding the partial agreement, stipulation and recommendation of
the parties or the ESM settlement.
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.
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to the
Companies' policies, use of these financial instruments is intended to
mitigate risk and earnings volatility and is not speculative in nature.
- - Page 28 -
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 associated with a 1% change in
base interest rates of LG&E's and KU's unswapped debt is estimated at $3.0
million and $3.4 million, respectively, at March 31, 2004. LG&E's exposure
to floating interest rates decreased $1.45 million and KU's exposure to
floating interest rates decreased $1.02 million during the first three
months of 2004.
The potential loss in fair value of LG&E's interest rate swaps resulting
from a hypothetical 1% change in base interest rates is estimated at
approximately $28.7 million as of March 31, 2004. The potential loss in
fair value of KU's interest rate swaps resulting from a hypothetical 1%
change in base interest rates is estimated at approximately $3.3 million as
of March 31, 2004. These estimates are derived from third-party
valuations. Changes in the market values of these swaps, if held to
maturity, will have no affect on LG&E's or KU's net income or cash flow.
Pension Risk
LG&E's and KU's costs of providing defined-benefit pension retirement plans
is dependent upon a number of factors, such as the rates of return on plan
assets, discount rate, and contributions made to the plan. At December 31,
2002, LG&E was required to recognize an additional minimum liability as
prescribed by SFAS No. 87, Employers' Accounting for Pensions. The
liability was recorded as a reduction to other comprehensive income, and
did not affect net income. The amount of the liability depended upon the
asset returns experienced in 2002 and contributions made by LG&E to the
plan during 2002. If the fair value of the plan assets exceeds the
accumulated benefit obligation, the recorded liability will be reduced and
other comprehensive income will be restored in the consolidated balance
sheet.
A 1% increase or decrease in the assumed discount rate could have an
approximate $41 million positive or negative impact to the accumulated
benefit obligation of LG&E. A 1% increase or decrease in the assumed
discount rate could have an approximate $27 million positive or negative
impact to the accumulated benefit obligation of KU.
In January 2004, LG&E and KU made contributions to their pension plans of
$34.5 million and $43.4 million, respectively.
Energy Trading & Risk Management Activities
The table below summarizes LG&E's and KU's energy trading and risk
management activities for the three months ended March 31, 2004, and 2003.
Trading volumes are allocated evenly between LG&E and KU.
Three Months Ended
March 31,
2004 2003
(in thousands)
Fair value of contracts at beginning of
period, net asset/(liability) $ 572 $ (156)
Fair value of contracts when entered
into during the period - 2,620
Contracts realized or otherwise
settled during the period (150) (57)
Changes in fair value due to changes
in assumptions 181 (2,004)
Fair value of contracts at end of period,
net asset/(liability) $ 603 $ 403
No changes to valuation techniques for energy trading and risk management
activities occurred during 2004 or 2003. Changes in market pricing,
interest rate and volatility assumptions were made during all periods. All
contracts outstanding at March 31, 2004, have a maturity of less than one
year and are valued using prices actively quoted for proposed or executed
transactions or quoted by brokers.
- - Page 29 -
LG&E and KU maintain policies intended to minimize credit risk and revalue
credit exposures daily to monitor compliance with those policies. As of
March 31, 2004, 100% of the trading and risk management commitments were
with counterparties rated BBB-/Baa3 equivalent or better.
Item 4. Controls and Procedures.
LG&E and KU maintain a system of disclosure controls and procedures
designed to ensure that information required to be disclosed by the
Companies in reports they file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission rules and
forms. LG&E and KU conducted an evaluation of such controls and procedures
under the supervision and with the participation of the Companies'
management, including the Chairman, President and Chief Executive Officer
("CEO") and the Chief Financial Officer ("CFO"). Based upon that
evaluation, the CEO and CFO are of the conclusion that the Companies'
disclosure controls and procedures are effective as of the end of the
period covered by this report. There has been no change in the Companies'
internal control over financial reporting that occurred during the fiscal
quarter ended March 31, 2004, that has materially affected, or is
reasonably likely to materially affect, the Companies' internal control
over financial reporting.
- - Page 30 -
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, 2003: Item 1, Business; Item 3, Legal
Proceedings; Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and Item 8, Financial Statements and
Supplementary Data. 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.
Electric and Gas Rate Cases
During May 2004, the Kentucky Commission held hearings on the applications
filed by LG&E and KU for increases in base rates. For a description of
developments in these cases, see Note 11 of the Notes to Consolidated
Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-
Q. Final orders in the proceedings are expected before July 2004.
MISO
During March and April 2004, the Kentucky Commission held hearings in the
proceedings examining the cost and benefits of MISO membership, including
rate treatment of MISO costs and continued LG&E and KU participation. A
final order in the proceedings is anticipated in mid-2004.
OVEC Power Agreement and Related Matter
On April 30, 2004, OVEC and its shareholders, including LG&E and KU,
entered into an Amended and Restated Inter-Company Power Agreement, to be
effective beginning March 2006, upon the expiration of the current power
contract among the parties. Under the new contract, which has a 20-year
term from its effective date, LG&E and KU have purchase rights for 5.63%
and 2.5%, respectively, of OVEC power at marginal cost-based rates. LG&E
and KU are entitled to 7% and 2.5% of OVEC power, respectively, under the
current contract.
In addition, LG&E will purchase from American Electric Power Company Inc.
("AEP") an additional 0.73% interest in OVEC for a purchase price of
approximately $104,000, resulting in an increase in LG&E ownership in OVEC
from 4.9% to 5.63%. The share purchase transaction is anticipated to be
completed during 2004, subject to receipt of certain regulatory approvals.
Item 6. Exhibits and Reports on Form 8-K.
6(a) Applicable to Form
10-Q of
Exhibit
No. LG&E KU Description
31 X X Certification - Section 302 of Sarbanes-Oxley Act of 2002
31.1X Certification of Chairman of the Board, President and Chief
Executive Officer, pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
31.2X Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.3 X Certification of Chairman of the Board, President and Chief
Executive Officer, pursuant to Section 203 of the
Sarbanes-Oxley Act of 2002
31.4 X Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 X X Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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Certain instruments defining the rights of holders of certain long-term
debt of LG&E and KU have not been filed with the SEC but will be furnished
to the SEC upon request.
6(b). Reports on Form 8-K.
None.
- - Page 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Louisville Gas and Electric Company
Registrant
Date: May 13, 2004 /s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
(On behalf of the registrant in his
capacities as Principal Financial Officer
and Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kentucky Utilities Company
Registrant
Date: May 13, 2004 /s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
(On behalf of the registrant in his
capacities as Principal Financial Officer
and Principal
Accounting Officer)