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, 2005
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, 2005,
all held by LG&E Energy LLC
Kentucky Utilities Company
37,817,878 shares, without par value, as of April 30, 2005,
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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INDEX OF ABBREVIATIONS
AEP American Electric Power Company, Inc.
AG Attorney General of Kentucky
ARB Accounting Research Bulletin
ARO Asset Retirement Obligation
CCN Certificate of Public Convenience and Necessity
DSM Demand Side Management
ECR Environmental Cost Recovery
EEI Electric Energy, Inc.
E.ON E.ON AG
ESM Earnings Sharing Mechanism
FAC Fuel Adjustment Clause
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Fidelia Fidelia Corporation (an E.ON affiliate)
FIN FASB Interpretation No.
FGD Flue Gas Desulfurization
FSP FASB Staff Position
IMEA Illinois Municipal Electric Agency
IMPA Indiana Municipal Power Agency
IRS Internal Revenue Service
Kentucky Commission Kentucky Public Service Commission
KU Kentucky Utilities Company
LIBOR London Interbank Offer Rate
LEM LG&E Energy Marketing Inc.
LG&E Louisville Gas and Electric Company
LG&E Energy LG&E Energy LLC (as successor to LG&E Energy Corp.)
LG&E Services LG&E Energy Services Inc.
LMP Locational Marginal Pricing
MGP Manufactured Gas Plant
MISO Midwest Independent Transmission System Operator Inc.
Moody's Moody's Investor Services, Inc.
Mw Megawatts
Mwh Megawatt hours
NOPR Notice of Proposed Rulemaking
OMU Owensboro Municipal Utilities
OVEC Ohio Valley Electric Corporation
PJM PJM Interconnection, LLC
Powergen Powergen Limited (formerly Powergen plc)
PUHCA Public Utility Holding Company Act of 1935
RTO Regional Transmission Operator
S&P Standard & Poor's Rating Services
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
SMD Standard Market Design
SO2 Sulfur Dioxide
VDT Value Delivery Team Process
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TABLE OF CONTENTS
PART I
ITEM 1 FINANCIAL STATEMENTS (UNAUDITED)
LOUISVILLE GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME 1
STATEMENTS OF RETAINED EARNINGS 1
BALANCE SHEETS 2
STATEMENTS OF CASH FLOWS 4
STATEMENTS OF OTHER COMPREHENSIVE INCOME 5
KENTUCKY UTILITIES COMPANY
STATEMENTS OF INCOME 6
STATEMENTS OF RETAINED EARNINGS 6
BALANCE SHEETS 7
STATEMENTS OF CASH FLOWS 9
STATEMENTS OF OTHER COMPREHENSIVE INCOME 10
NOTES TO FINANCIAL STATEMENTS 11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. 25
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 32
ITEM 4 CONTROLS AND PROCEDURES. 34
PART II
ITEM 1 LEGAL PROCEEDINGS 35
ITEM 6 EXHIBITS 35
SIGNATURES 36
EXHIBITS 37
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Part I. Financial Information - Item 1. Financial Statements (Unaudited)
Louisville Gas and Electric Company
Statements of Income
(Unaudited)
(Millions of $)
Three Months Ended
March 31,
2005 2004
OPERATING REVENUES (Note 4):
Electric $229.8 $198.3
Gas 172.6 163.7
Total operating revenues 402.4 362.0
OPERATING EXPENSES:
Fuel for electric generation 60.3 52.9
Power purchased 39.0 28.9
Gas supply expenses 135.6 130.8
Other operation and maintenance expenses 75.2 74.3
Depreciation and amortization 30.7 27.5
Total operating expenses 340.8 314.4
NET OPERATING INCOME 61.6 47.6
Other income (expense) - net 0.2 (0.8)
Interest expense (Note 3) 5.8 4.8
Interest expense to affiliated companies (Note 9) 3.1 3.1
INCOME BEFORE INCOME TAXES 52.9 38.9
Federal and state income taxes (Note 6) 19.0 14.7
NET INCOME $ 33.9 $ 24.2
The accompanying notes are an integral part of these financial statements.
Statements of Retained Earnings
(Unaudited)
(Millions of $)
Three Months Ended
March 31,
2005 2004
Balance at beginning of period $534.0 $497.5
Net income 33.9 24.2
Subtotal 567.9 521.7
Cash dividends declared on stock:
5% cumulative preferred 0.3 0.3
Auction rate cumulative preferred 0.4 0.2
Common 29.0 -
Subtotal 29.7 0.5
Balance at end of period $538.2 $521.2
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Balance Sheets
(Unaudited)
(Millions of $)
ASSETS
March 31, December 31,
2005 2004
CURRENT ASSETS:
Cash and cash equivalents $ 6.7 $ 6.8
Accounts receivable -
less reserve of $1.2 million and $0.8 million as of
March 31, 2005 and December 31, 2004,
respectively 161.4 167.0
Materials and supplies - at average cost:
Fuel (predominantly coal) 21.9 21.8
Gas stored underground 24.8 77.5
Other 26.2 26.1
Prepayments and other 4.9 3.9
Total current assets 245.9 303.1
OTHER PROPERTY AND INVESTMENTS -
less reserve of less than $0.1 million as of
March 31, 2005 and December 31, 2004 0.6 0.5
UTILITY PLANT:
At original cost 3,934.3 3,915.8
Less: reserve for depreciation 1,432.4 1,396.3
Net utility plant 2,501.9 2,519.5
DEFERRED DEBITS AND OTHER ASSETS:
Restricted cash 10.8 10.9
Unamortized debt expense 8.4 8.4
Regulatory assets (Note 5) 76.4 91.9
Other 32.8 32.2
Total deferred debits and other assets 128.4 143.4
Total assets $2,876.8 $2,966.5
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Balance Sheets (cont.)
(Unaudited)
(Millions of $)
CAPITALIZATION AND LIABILITIES
March 31, December 31,
2005 2004
CURRENT LIABILITIES:
Current portion of mandatorily
redeemable preferred stock $ 1.3 $ 1.3
Current portion of long-term debt 246.2 246.2
Current portion of long-term debt to
affiliated company (Note 8) - 50.0
Notes payable to affiliated companies (Note 8) 35.0 58.2
Accounts payable 88.2 106.1
Accounts payable to affiliated companies (Note 9) 26.3 31.7
Accrued income taxes 31.4 6.2
Customer deposits 15.0 14.0
Other 4.8 18.5
Total current liabilities 448.2 532.2
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 326.3 347.2
Investment tax credit, in process of amortization 45.2 46.2
Accumulated provision for pensions
and related benefits 122.1 120.6
Customer advances for construction 9.6 10.6
Asset retirement obligation 10.4 10.3
Regulatory liabilities (Note 5):
Accumulated cost of removal of utility plant 214.1 220.2
Other 72.5 52.2
Other 26.1 29.4
Total deferred credits and other liabilities 826.3 836.7
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares 425.2 425.2
Common stock expense (0.8) (0.8)
Additional paid-in capital 40.0 40.0
Accumulated other comprehensive loss (45.1) (45.6)
Retained earnings 538.2 534.0
Total common equity 957.5 952.8
Cumulative preferred stock 70.4 70.4
Mandatorily redeemable preferred stock 21.3 21.3
Long-term debt (Note 8) 328.1 328.1
Long-term debt to affiliated company (Note 8) 225.0 225.0
Total capitalization 1,602.3 1,597.6
Total capital and liabilities $2,876.8 $2,966.5
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Statements of Cash Flows
(Unaudited)
(Millions of $)
Three Months Ended
March 31,
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 33.9 $ 24.2
Items not requiring cash currently:
Depreciation and amortization 30.7 27.5
VDT amortization 7.6 7.5
Change in fair value of derivative instruments (1.3) 6.1
Other (0.1) (3.8)
Changes in current assets and liabilities-net 46.3 (29.2)
Pension funding (Note 11) - (34.5)
Gas supply clause receivable, net 1.9 7.8
Earnings sharing mechanism receivable 3.5 3.0
Other (1.2) 7.7
Net cash provided by operating activities 121.3 16.3
CASH FLOWS USED IN INVESTING ACTIVITIES:
(Purchase) sale of long-term investments (0.1) 0.1
Construction expenditures (18.5) (27.0)
Net cash used for investing activities (18.6) (26.9)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from affiliated company (Note 8) - 125.0
Repayment of long-term borrowings
from affiliated company (Note 8) (50.0) -
Short-term borrowings from affiliated company (Note 8) - 131.2
Repayment of short-term borrowings
from affiliated company (23.2) (218.2)
Payment of dividends (29.7) (0.4)
Other 0.1 (0.1)
Net cash (used for) provided by financing
activities (102.8) 37.5
CHANGE IN CASH AND CASH EQUIVALENTS (0.1) 26.9
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6.8 1.7
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6.7 $ 28.6
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ (0.7) $ (5.2)
Interest on borrowed money $ 3.9 $ 3.9
Interest to affiliated companies on borrowed money $ 4.0 $ 2.8
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Statements of Other Comprehensive Income
(Unaudited)
(Millions of $)
Three Months Ended
March 31,
2005 2004
Net income $33.9 $24.2
Income Taxes - Minimum Pension Liability (Note 6) (1.1) -
Gain (loss) on derivative instruments and hedging
activities - net of tax benefit/(expense) of
$(1.0) and $2.4 for 2005 and 2004,
respectively (Note 3) 1.6 (3.6)
Other comprehensive income (loss), net of tax 0.5 (3.6)
Comprehensive income $34.4 $20.6
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Statements of Income
(Unaudited)
(Millions of $)
Three Months Ended
March 31,
2005 2004
OPERATING REVENUES $287.5 $247.4
OPERATING EXPENSES:
Fuel for electric generation 87.4 70.0
Power purchased 46.3 41.3
Other operation and maintenance expenses 59.6 54.5
Depreciation and amortization 28.6 25.2
Total operating expenses 221.9 191.0
NET OPERATING INCOME 65.6 56.4
Other income - net 1.0 0.4
Interest expense (Note 3) 2.9 0.7
Interest expense to affiliated companies (Note 9) 3.6 3.6
NET INCOME BEFORE INCOME TAXES 60.1 52.5
Federal and state income taxes (Note 6) 22.6 20.1
NET INCOME $ 37.5 $ 32.4
The accompanying notes are an integral part of these financial statements.
Statements of Retained Earnings
(Unaudited)
(Millions of $)
Three Months Ended
March 31,
2005 2004
Balance at beginning of period $659.4 $591.2
Net income 37.5 32.4
Subtotal 696.9 623.6
Cash dividends declared on stock:
4.75% cumulative preferred 0.2 0.2
6.53% cumulative preferred 0.3 0.3
Common 30.0 -
Subtotal 30.5 0.5
Balance at end of period $666.4 $623.1
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Balance Sheets
(Unaudited)
(Millions of $)
ASSETS
March 31, December 31,
2005 2004
CURRENT ASSETS:
Cash and cash equivalents $ 3.9 $ 4.6
Accounts receivable - less reserve of $0.7 million
and $0.6 million as of March 31, 2005 and
December 31, 2004,respectively 103.6 112.6
Materials and supplies - at average cost:
Fuel (predominantly coal) 49.9 52.2
Other 28.4 28.0
Prepayments and other 9.4 9.9
Total current assets 195.2 207.3
OTHER PROPERTY AND INVESTMENTS -
less reserve of $0.1 million as of March 31,
2005 and December 31, 2004, respectively 21.1 20.5
UTILITY PLANT:
At original cost 3,730.6 3,712.1
Less: reserve for depreciation 1,438.1 1,415.0
Net utility plant 2,292.5 2,297.1
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4.7 4.7
Regulatory assets (Note 5) 58.9 61.4
Long-term derivative asset 5.5 6.1
Other 14.6 13.3
Total deferred debits and other assets 83.7 85.5
Total assets $2,592.5 $2,610.4
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Balance Sheets (cont.)
(Unaudited)
(Millions of $)
CAPITALIZATION AND LIABILITIES
March 31, December
31,
2005 2004
CURRENT LIABILITIES:
Current portion of long-term debt $ 123.1 $ 87.1
Current portion of long-term notes to
affiliated company 75.0 75.0
Notes payable to affiliated company (Note 8) 26.0 34.8
Accounts payable 50.3 77.9
Accounts payable to affiliated companies (Note 9) 21.0 32.8
Accrued income taxes 33.4 5.9
Customer deposits 15.7 15.0
Other 4.6 15.4
Total current liabilities 349.1 343.9
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 267.7 282.6
Investment tax credit, in process of amortization 3.4 3.8
Accumulated provision for pensions and
related benefits 80.0 77.9
Asset retirement obligation 21.2 21.0
Regulatory liabilities (Note 5):
Accumulated cost of removal of utility plant 271.6 266.8
Other 41.4 24.7
Other 15.9 17.0
Total deferred credits and other liabilities 701.2 693.8
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares 308.1 308.1
Common stock expense (0.3) (0.3)
Additional paid-in capital 15.0 15.0
Accumulated other comprehensive loss (13.6) (13.3)
Retained earnings 653.8 647.3
Undistributed subsidiary earnings 12.6 12.1
Total common equity 975.6 968.9
Cumulative preferred stock 39.7 39.7
Long-term debt (Note 8) 268.9 306.1
Long-term debt to affiliated company (Note 8) 258.0 258.0
Total capitalization 1,542.2 1,572.7
Total capital and liabilities $2,592.5 $2,610.4
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Statements of Cash Flows
(Unaudited)
(Millions of $)
Three Months Ended
March 31,
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37.5 $ 32.4
Items not requiring cash currently:
Depreciation and amortization 28.6 25.2
VDT amortization 2.9 2.9
Change in fair value of derivative instruments (1.2) (0.5)
Other (1.1) 6.4
Changes in current assets and liabilities (10.6) (41.7)
Earnings sharing mechanism receivable 5.1 3.3
Pension funding (Note 11) - (43.4)
Other (3.8) 10.9
Net cash provided by operating activities 57.4 (4.5)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of long-term investments (0.1) (0.7)
Construction expenditures (18.5) (38.6)
Net cash flows used in investing activities (18.6) (39.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from affiliated company (Note 8) - 50.0
Short-term borrowings from affiliated company (Note 8) - 128.0
Repayment of short-term borrowings
from affiliated company (8.9) (130.5)
Payment of dividends (30.6) (0.5)
Net cash flows from financing activities (39.5) 47.0
CHANGE IN CASH AND CASH EQUIVALENTS (0.7) 3.2
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4.6 4.9
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3.9 $ 8.1
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ (2.3) $ 1.0
Interest on borrowed money $ 2.2 $ 1.6
Interest to affiliated companies on borrowed money $ 3.2 $ 2.2
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Statements of Other Comprehensive Income
(Unaudited)
(Millions of $)
Three Months Ended
March 31,
2005 2004
Net income $37.5 $32.4
Income Taxes - Minimum Pension Liability (Note 6) (0.3) -
Other comprehensive loss, net of tax (0.3) -
Comprehensive income $37.2 $32.4
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Kentucky Utilities Company
Notes to Financial Statements
(Unaudited)
1. General
The unaudited financial statements include the accounts of LG&E and KU.
The common stock of each of LG&E and KU is wholly-owned by 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 financial position,
results of operations, comprehensive income and cash flows for the
periods indicated. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to SEC rules and regulations, although the Companies believe
that the disclosures are adequate to make the information presented not
misleading.
See LG&E's and KU's Annual Reports on Form 10-K for the year ended
December 31, 2004, 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, 2004, have been revised to conform to certain reclassifications in
the current three months ended March 31, 2005. These reclassifications
had no impact on net assets or net income, as previously reported. LG&E
and KU net operating income previously reported for the three months
ended March 31, 2004 increased by $15.0 million and $21.1 million,
respectively, because the income statement presentation was changed in
2005 to report income tax expense in the category Federal and State
income taxes, which appears just before net income. LG&E and KU other
income (expense) - net previously reported for the three months ended
March 31, 2004 decreased $0.3 million and $1.0 million, respectively,
also due to the income tax reclassification.
2. Mergers and Acquisitions
On July 1, 2002, E.ON completed its acquisition of Powergen, including
LG&E Energy, for approximately 5.1 billion pounds sterling ($7.3 billion).
As a result of the acquisition, LG&E Energy became a wholly-owned
subsidiary of E.ON and, as a result, LG&E and KU also became indirect
subsidiaries of E.ON. LG&E and KU have continued their separate
identities and serve customers under their existing names. The preferred
stock and debt securities of LG&E and KU were not affected by this
transaction and the utilities continue to file SEC reports. Following the
acquisition, E.ON became a registered holding company under PUHCA. LG&E
and KU, as subsidiaries of a registered holding company, are subject to
additional regulations under PUHCA. In March 2003, 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. In early 2004, LG&E Energy commenced direct reporting
arrangements to E.ON.
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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, 2005, LG&E was party to various interest rate swap
agreements with aggregate notional amounts of $211.3 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 1.86% at March 31, 2005. The swap
agreements in effect at March 31, 2005 have been designated as cash
flow hedges and mature on dates ranging from 2020 to 2033. The hedges
have been deemed to be fully effective resulting in a pretax gain of
$2.6 million for the three months ended March 31, 2005, 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. A deposit in the amount of $10.8 million, used as
collateral for the $83.3 million interest rate swap, is classified as
restricted cash on LG&E's balance sheet. The amount of the deposit
required is tied to the market value of the swap.
In February 2005, an LG&E interest rate swap with a notional amount of
$17 million matured. The swap was fully effective upon expiration,
therefore, the impact on earnings and other comprehensive income from
the swap maturity was less than $0.1 million.
As of March 31, 2005, KU was party to various interest rate swap
agreements with aggregate notional amounts of $103.0 million. Under
these swap agreements, KU paid variable rates based on either LIBOR or
the Bond Market Association's municipal swap index averaging 3.80%, and
received fixed rates averaging 7.74% at March 31, 2005. The swap
agreements in effect at March 31, 2005 have been designated as fair
value hedges and mature on dates ranging from 2007 to 2025. For 2005,
the effect of marking these financial instruments and the underlying
debt to market resulted in pretax gains recorded in interest expense of
$0.7 million.
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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, 2005, KU's debt reflects a $7.0 million mark-
to-market adjustment.
4. Segments of Business
LG&E's revenues and net income by business segment for the three months
ended March 31, 2005 and 2004, follow:
Three Months Ended
March 31,
(in millions) 2005 2004
LG&E Electric
Revenues $ 229.8 $ 198.3
Net income 23.9 15.9
Total assets 2,394.1 2,427.4
LG&E Gas
Revenues 172.6 163.7
Net income 10.0 8.3
Total assets 482.7 469.6
Total
Revenues 402.4 362.0
Net income 33.9 24.2
Total assets 2,876.8 2,897.0
KU is an electric utility company. It does not provide gas service and
therefore, is presented as a single business segment.
5. Rates and Regulatory Matters
For a description of each line item of regulatory assets and
liabilities for LG&E and KU, reference is made to Part I, Item 8,
Financial Statements and Supplementary Data, Note 3 of LG&E's and KU's
Annual Reports on Form 10-K for the year ended December 31, 2004.
The following regulatory assets and liabilities were included in LG&E's
balance sheets as of March 31, 2005 and December 31, 2004:
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Louisville Gas and Electric Company
(Unaudited)
March 31, December 31,
(in millions) 2005 2004
VDT Costs $ 30.1 $ 37.7
Unamortized loss on bonds 20.0 20.3
ARO 7.1 6.9
Merger surcredit 4.5 4.8
ESM - 2.1
Rate case expenses 1.0 1.1
FAC - 0.8
Gas supply adjustments due from customers 10.2 13.3
Gas performance base ratemaking 2.4 3.7
Manufactured gas sites 1.1 1.2
Total regulatory assets $ 76.4 $ 91.9
Accumulated cost of removal of utility plant $214.1 $220.2
Deferred income taxes - net (Note 6) 55.8 37.2
ARO 0.1 0.1
ECR 4.0 4.0
FAC 0.8 -
ESM 1.4 -
DSM 3.3 2.5
Gas supply adjustments due to customers 7.1 8.4
Total regulatory liabilities $286.6 $272.4
LG&E currently earns a return on all regulatory assets except for gas
supply adjustments, ESM, FAC, and gas performance based ratemaking, 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 removed.
The following regulatory assets and liabilities were included in KU's
balance sheets as of March 31, 2005 and December 31, 2004:
- Page 14 -
Kentucky Utilities Company
(Unaudited)
March 31, December 31,
(in millions) 2005 2004
VDT costs $ 11.8 $ 14.7
Unamortized loss on bonds 11.2 11.4
ARO 13.3 12.8
Merger surcredit 3.5 3.7
ESM - 3.1
Rate case expenses 1.0 1.1
FAC 13.1 9.4
Deferred storm costs 3.4 3.6
Post retirement and pension 1.2 1.2
Management audit expenses 0.4 0.4
Total regulatory assets $ 58.9 $ 61.4
Accumulated cost of removal of utility plant $271.6 $266.8
Deferred income taxes - net (Note 6) 32.4 19.3
ARO 1.5 1.4
ECR 2.5 1.2
FAC - 0.1
ESM 2.0 -
DSM 1.9 1.6
Spare parts 1.1 1.1
Total regulatory liabilities $313.0 $291.5
KU currently earns a return on all regulatory assets except for ESM and
FAC, both 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 removed.
Based on an order from the Kentucky Commission in September 2004, KU
reclassified from maintenance expense to a regulatory asset, $4.0
million related to costs not reimbursed from the 2003 ice storm. These
costs will be amortized through June 2009. These amortized costs,
which are included in KU's jurisdictional operating expenses, are
recovered in base rates.
Due to a number of changes in Kentucky's tax system, including the
reduction of the Corporate income tax, timing differences included in
the reserve for deferred state income taxes at December 31, 2004 will
reverse at lower rates than previously provided. See Note 6.
- 15 -
ELECTRIC AND GAS RATE CASES
On June 30, 2004, the Kentucky Commission issued an order approving an
increase in the base electric rates of LG&E and KU and the gas rates of
LG&E. The rate increases took effect on July 1, 2004.
During July 2004, the AG served subpoenas on LG&E and KU, as well as on
the Kentucky Commission and its staff, requesting information regarding
alleged improper communications between LG&E and KU and the Kentucky
Commission. The Kentucky Commission procedurally reopened the rate case
for the limited purpose of taking evidence, if any, as to the
communication issues. In September and October 2004, various
proceedings were held in circuit courts in Franklin and Jefferson
Counties, Kentucky regarding the scope and timing of document
production or other information required or agreed to be produced under
the AG's subpoenas and matters were consolidated into the Franklin
County court.
In January 2005, the AG conducted interviews of certain employees of
LG&E and KU and submitted its report to the Franklin County, Kentucky
Circuit Court in confidence. Concurrently, the AG filed a motion
summarizing the report as containing evidence of improper
communications and record-keeping errors by LG&E and KU in their
conduct of activities before the Kentucky Commission or other state
governmental entities and requesting release of the report to such
agencies. During February 2005, the court ruled that the report be
forwarded to the Kentucky Commission under continued confidential
treatment to allow it to consider the report, including its impact, if
any, on completing its investigation and any remaining steps in the
rate case, including ending the current abeyance. To date, LG&E and KU
have neither seen nor requested copies of the report or its contents.
LG&E and KU believe no improprieties have occurred in their
communications with the Kentucky Commission and are cooperating with
the proceedings before the AG and the Kentucky Commission.
LG&E and KU are currently unable to determine any possible future
actions of the AG or the Kentucky Commission or the ultimate impact, if
any, of the AG's report and investigation, including whether there will
be further actions to appeal, review or otherwise challenge the granted
increases in base rates.
- 16 -
VDT
The current five-year VDT amortization period is scheduled to expire in
March 2006. As part of the settlement agreements in the electric and
gas rate cases, LG&E and KU shall file with the Kentucky Commission a
plan for the future ratemaking treatment of the VDT surcredits and
costs six months prior to the March 2006 expiration. The surcredit
shall remain in effect following the expiration of the fifth year until
the Commission enters an order on the future disposition of VDT-related
issues.
ECR
In December 2004, KU and LG&E filed applications with the Kentucky
Commission for approval of a CCN to construct new SO2 control
technology (FGDs) at KU's Ghent and Brown stations, and to amend LG&E's
compliance plan to allow recovery of new and additional environmental
compliance facilities. The estimated capital cost of the additional
facilities is $742.7 million ($40.2 million for LG&E and $702.5 million
for KU), of which $658.9 million is for the FGDs. Hearings in these
cases occurred during May 2005 and final orders are expected in June
2005.
MISO
The MISO implemented a day-ahead and real-time market, including a
congestion management system in April 2005. This system is similar to
the LMP system currently used by the PJM RTO and contemplated in FERC's
SMD NOPR, currently being discussed. The MISO filed with FERC a
mechanism for recovery of costs for the congestion management system.
The MISO proposed the addition of two new Schedules, 16 and 17.
Schedule 16 is the MISO's cost recovery mechanism for the Financial
Transmission Rights Administrative Service it provides. Schedule 17 is
the MISO's mechanism for recovering costs it incurs for providing
Energy Marketing Support Administrative Service. The MISO transmission
owners, including LG&E and KU, objected to the allocation of costs
among market participants and retail native load. FERC ruled in 2004 in
favor of the MISO.
The Kentucky Commission opened an investigation into LG&E and KU's
memberships in the MISO in July 2003. The Kentucky Commission directed
LG&E and KU to file testimony addressing the costs and benefits of the
MISO membership both currently and over the next five years and other
legal issues surrounding continued membership. LG&E and KU engaged an
independent third-party to conduct a cost-benefit analysis on this
issue. The information was filed with the Kentucky Commission in
September 2003. The analysis and testimony supported the exit from the
MISO, under certain conditions. The MISO filed its own testimony and
cost benefit analysis in December 2003. A final Kentucky Commission
order was expected in the second quarter of 2004. The ruling has since
been delayed due to the Kentucky Commission's request for additional
testimony on the MISO's Market Tariff filing at FERC; a ruling is
expected by summer 2005.
- 17 -
Should LG&E and KU be ordered to exit the MISO, current MISO rules may
also impose an exit fee. While LG&E and KU believe legal and
regulatory precedent should permit most or many of the MISO-related
costs to be recovered in their rates charged to customers, they can
give no assurance that state or federal regulators will ultimately
agree with such position with respect to all costs, components or
timing of recovery. In April 2005, the Kentucky Commission issued an
order declining an LG&E and KU request for an automatic monthly tracker
of certain MISO-related costs, to be recovered through a new rate
mechanism.
At this time, LG&E and KU cannot predict the outcome or effects of the
various FERC and Kentucky Commission proceedings described above,
including whether such proceedings will have a material impact on the
financial condition or results of operations of the Companies.
Financial consequences (changes in transmission revenues and costs)
associated with the transmission market tariff charges are subject to
varying assumptions and calculations and are therefore difficult to
estimate. Changes in revenues and costs related to broader shifts in
energy market practices and economics are not currently estimable.
KENTUCKY COMMISSION STRATEGIC BLUEPRINT
In February 2005, Kentucky's Governor signed an executive order
directing the Kentucky Commission, in conjunction with the Commerce
Cabinet and the Environmental and Public Protection Cabinet, to
develop a Strategic Blueprint for the continued use and development of
electric energy'. This Strategic Blueprint will be designed to promote
future investment in electric infrastructure for the Commonwealth of
Kentucky, to protect Kentucky's low-cost electric advantage, to
maintain affordable rates for all Kentuckians, and to preserve
Kentucky's commitment to environmental protection. In March 2005, the
Kentucky Commission established Administrative Case No. 2005-00090 to
collect information from all jurisdictional utilities in Kentucky,
including LG&E and KU, pertaining to Kentucky electric generation,
transmission and distribution systems. The Kentucky Commission must
provide its Strategic Blueprint to the Governor in early August 2005.
LG&E and KU responded to the Kentucky Commission's first set of data
requests at the end of March 2005.
6. Income Taxes
Kentucky House Bill 272, also known as Kentucky's Tax Modernization
Plan, was signed into law on March 18, 2005. This bill contains a
number of changes in Kentucky's tax system, including the reduction of
the Corporate income tax rate from 8.25% to 7% effective January 1,
2005, and a further reduction to 6% effective January 1, 2007. Because
of the tax rate reduction, timing differences included in the reserve
for deferred state income taxes at December 31, 2004, will reverse at
lower rates than previously provided. Without some form of adjustment,
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the deferred tax reserve amount will exceed the actual deferred tax
liability attributable to existing timing differences. This excess
amount is referred to as excess deferred income taxes. The Company has
filed an application with the Kentucky Commission requesting approval
of its accounting treatment to establish and amortize a regulatory
liability for its net excess deferred tax balance. Both LG&E and KU
are amortizing their depreciation-related excess deferred tax balances
under the average rate assumption method. The average rate assumption
method matches the amortization of the excess deferred taxes with the
life of the timing differences to which it relates.
Significant judgment is required in determining the provision for
income taxes, and there are many transactions for which the ultimate
tax outcome is uncertain. To provide for these uncertainties
or exposures, LG&E and KU maintain an allowance for tax contingencies,
the balance of which management believes is adequate. Tax
contingencies are analyzed periodically and adjustments are made when
events occur to warrant a change. LG&E and KU are currently in the
examination phase of IRS audits for the years 1999 to 2003 and
expect some or all of these audits to be completed within the
next twelve months. LG&E is also under a Kentucky sales and use tax
audit for the periods October 1, 1997 through December 31, 2001, and an
initial assessment is expected within the next three months. The
results of audit assessments by taxing authorities could have a
material effect on quarterly or annual cash flows as well as results of
operations over the next three to twelve months as these audits are
completed. However, LG&E and KU do not believe that any of these
matters will have a material adverse effect on results of operations.
7. New Accounting Pronouncements
FSP 106-2
In May 2004, the FASB finalized FSP 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("Medicare Act") with guidance on accounting
for subsidies provided under the Medicare Act which became law in
December 2003. FSP 106-2 was effective for the first interim or annual
period beginning after June 15, 2004. FSP 106-2 does not have a
material impact on LG&E or KU.
FSP 109-1
In December 2004, the FASB finalized FSP 109-1, Accounting for Income
Taxes, Application of FAS 109 to the Tax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of
2004, which requires the tax deduction on qualified production
activities to be treated as a special deduction in accordance with FAS
109. FSP 109-1 became effective December 21, 2004. For the three
months ended March 31, 2005, LG&E and KU recognized $0.4 million and
$0.2 million, respectively, in tax benefits related to this deduction.
- 19 -
FIN 47
In March 2005, the FASB issued Financial Accounting Standards Board
Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations, an interpretation of FASB Statement No. 143 ("FIN 47").
FIN 47 clarifies that the term "conditional asset retirement
obligation" as used in SFAS No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement
are conditional on a future event that may or may not be within the
control of the entity. The obligation to perform the asset retirement
activity is unconditional even though uncertainty exists about the
timing and (or) method of settlement. An entity is required to
recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be
reasonably estimated. The fair value of a liability for the
conditional asset retirement obligation should be recognized when
incurred; generally, upon acquisition, construction, or development and
through the normal operation of the asset. FIN 47 is effective no
later than the end of fiscal years ending after December 15, 2005. LG&E
and KU are currently evaluating the impact of this pronouncement.
8. 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 Balance
Sheets. The average annualized interest rate for these bonds during
the three months ending March 31, 2005 was 1.96% for both LG&E and KU.
During June 2004, LG&E renewed five revolving lines of credit with
banks totaling $185 million. There was no outstanding balance under
any of these facilities at March 31, 2005. The Company expects to
renew these facilities prior to their expiration in June 2005.
LG&E, KU and LG&E Energy participate in an intercompany money pool
agreement. Details of the balances at March 31, 2005 and March 31, 2004
were as follows:
Total Money Amount Balance Average
(millions of $) Pool Available Outstanding Available Interest Rate
March 31, 2005:
LG&E $400.0 $35.0 $365.0 2.65%
KU 400.0 26.0 374.0 2.65
March 31, 2004:
LG&E $400.0 $ - $400.0 -%
KU 400.0 40.7 359.3 0.98
- 20 -
LG&E Energy maintains a revolving credit facility totaling $200 million
with E.ON North America, Inc. to ensure funding availability for the
money pool. There was no balance outstanding on this facility at March
31, 2005.
In January 2005, LG&E paid at maturity a $50 million loan from Fidelia
using proceeds from short-term loans from the money pool.
In April 2005, LG&E refinanced $40 million in existing pollution
control indebtedness. The original indebtedness, 5.90% Pollution
Control Bonds, Series X, due April 15, 2023, was discharged on May 13,
2005, using the proceeds from the replacement indebtedness, LG&E
Pollution Control Bonds, Series HH, due February 1, 2035, which carry
a variable, auction rate of interest.
9. Related Party Transactions
LG&E, KU, subsidiaries of LG&E Energy and other subsidiaries of E.ON
engage in related-party transactions. 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 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
from affiliated companies for the three months ended March 31, 2005 and
2004 were as follows:
____LG&E____ ______KU______
(in millions) 2005 2004 2005 2004
Electric operating revenues from KU $25.8 $22.1 - -
Electric operating revenues from LG&E - - $30.1 $21.6
Electric operating revenues from LEM 0.3 0.7 - -
Purchased power from KU 30.1 21.6 - -
Purchased power from LG&E - - 25.8 22.1
- 21 -
Interest Charges
LG&E and KU intercompany interest income and expense for the three
months ended March 31, 2005 and 2004 were as follows:
____LG&E____ ______KU______
(in millions) 2005 2004 2005 2004
Interest on money pool loans $0.4 $ - $0.1 $0.2
Interest on Fidelia loans 2.7 3.1 3.5 3.4
Other Intercompany Billings
Other intercompany billings related to LG&E and KU for the three months
ended March 31, 2005 and 2004 were as follows:
(in millions) 2005 2004
LG&E Services billings to LG&E $32.3 $38.2
LG&E Services billing to KU 25.8 30.6
LG&E billings to LG&E Services 4.7 3.0
KU billings to LG&E Services 3.2 2.8
LG&E billings to KU 14.1 16.6
KU billings to LG&E 4.0 1.5
10. Commitments and Contingencies
Except as may be discussed in this Quarterly Report on Form 10-Q
(including Note 5), 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, 2004 (including in Notes 3 and 11 to the financial
statements of LG&E and KU contained therein.) See Notes 3 and 11 to
the Companies' Annual Report on Form 10-K for information regarding
such commitments or contingencies.
LITIGATION
The May 2004 litigation commenced by OMU against KU concerning a long-
term power supply contract continues. To date, OMU has claimed
approximately $6 million in damages for historical periods, as well as
injunctive and other relief, including a declaration that KU is in
material breach. KU currently has jurisdictional or summary judgment
motions, respectively, pending before the FERC and district court
regarding aspects of this matter.
ENVIRONMENTAL MATTERS
LG&E and KU are subject to SO2 and NOx emission limits on their
electric generating units pursuant to the Clean Air Act. LG&E and KU
placed into operation significant NOx controls to their generating
units prior to the 2004 Summer Ozone Season. As of December 31, 2004,
LG&E and KU incurred total capital costs of approximately $186 million
and $219 million, respectively, to reduce their NOx emissions below
required levels. In addition, LG&E and KU incur additional operating
and maintenance costs in operating new NOx controls.
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KU has implemented a plan for adding significant additional SO2
controls to its generating units. Installation of additional SO2
controls will proceed on a phased basis, with construction of controls
(i.e. FGDs) commencing in mid-2005 and continuing through the final
installation and operation in 2009. KU estimates that it will incur
$658.9 million in capital costs related to the construction of the FGDs
to achieve compliance with current emission limits on a company-wide
basis. In addition, KU will incur additional operating and maintenance
costs in operating new SO2 controls.
LG&E and KU are also monitoring several other air quality issues which
may potentially impact coal-fired power plants, including EPA's revised
air quality standards for ozone and particulate matter, measures to
implement EPA's regional haze rule, EPA's Clean Air Mercury Rule which
regulates mercury emissions from steam electric generating units and
reductions in emissions of SO2 and NOx required under the Clean Air
Interstate Rule.
In addition, LG&E is currently working with local regulatory
authorities to review the effectiveness of remedial measures aimed at
controlling particulate matter emissions from its Mill Creek Station.
From time to time, LG&E and KU conduct negotiations with the applicable
regulatory authorities to finalize cleanup plans or determine financial
responsibility concerning other environmental matters, including
remediation steps regarding former LG&E and KU MGP sites, a settlement
agreement relating to a fuel oil discharge at KU's E.W. Brown plant and
matters relating to a KU transformer scrap yard.
In January 2005, approximately 1,000 gallons of fuel oil leaked
from a cracked weld in a storage tank at KU's Green River
Generating Station. KU commenced immediate spill containment,
recovery and remediation actions and has received satisfactory
inspections from state regulators to date. The cost related to
the cleanup of the oil spill was less than $0.2 million.
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
financial position or results of operations.
EEI CONTRACT
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
- 23 -
are expected to be comparable to the cost of other power generated by
KU. This contract governing the purchases from EEI will terminate on
December 31, 2005. Such power equated to approximately 10% of KU's net
generation system output in 2004 and for the first quarter of 2005.
Discussions are on-going related to the extension of the contract.
11. 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, 2005:
(in millions) LG&E KU
Pension and Other Benefit Plans:
Components of net period benefit cost
Service cost $ 1.7 $ 1.8
Interest cost 6.5 4.3
Expected return on plan assets (6.0) (4.0)
Amortization of prior service cost 1.3 0.3
Amortization of transition obligation - 0.2
Recognized actuarial loss 0.7 0.6
$ 4.2 $ 3.2
In January 2004, LG&E and KU made discretionary contributions to the
pension plan of $34.5 million and $43.4 million, respectively. No
discretionary contributions to the pension plans are planned for either
LG&E or KU for 2005, but one or both Companies may make a discretionary
contribution to the other post-retirement benefit plans.
12. Subsequent Events
On April 13, 2005, LG&E refinanced $40 million in existing pollution
control indebtedness. The original indebtedness, 5.90% Pollution
Control Bonds, Series X, due April 15, 2023, was discharged on May 13,
2005, using the proceeds from the replacement indebtedness, LG&E
Pollution Control Bonds, Series HH, due February 1, 2035, which carry a
variable, auction rate of interest.
On May 12, 2005, KU issued a redemption notice to bondholders for its
7.55% First Mortgage Bonds, Series R, totaling $50 million. It is
currently anticipated the bond will be redeemed on June 13, 2005, and
the Company will pay a call premium of 3.775%. KU has also received
notice from the counterparty to the interest rate swap related to this
bond that it will terminate the swap and pay to KU the same 3.775% call
premium pursuant to the terms of the swap.
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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, 2005, 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 SEC,
including the Annual Reports on Form 10-K for the year ended December 31,
2004.
Executive Summary
LG&E and KU, subsidiaries of LG&E Energy LLC (an indirect subsidiary of
E.ON), are regulated public utilities. LG&E supplies electricity to
approximately 391,000 customers and natural gas to approximately 320,000
customers in Louisville and adjacent areas in Kentucky. KU provides
electric service to approximately 490,000 customers in over 77 counties in
central, southeastern and western Kentucky, to approximately 30,000
customers in southwestern Virginia and to less than 10 customers in
Tennessee. KU also sells wholesale electric energy to 12 municipalities.
The mission of LG&E and KU is to build on our tradition and achieve world-
class status providing reliable, low-cost energy services and superior
customer satisfaction; and to promote safety, financial success and quality
of life for our employees, communities and other stakeholders.
LG&E and KU's strategy focuses on the following:
- Execute all our business processes to secure a world-class
competitive advantage
- Develop and transfer best practices in generation, customer service,
distribution and supply
- Operate our commercial hub to enhance margins and manage risks across
the company
- Pursue flexible asset portfolio management
- Attract, retain and develop the best people.
- 25 -
In a June 2004 order, the Kentucky Commission accepted the settlement
agreements reached by the majority of the parties in the rate cases filed
by LG&E and KU in December 2003. Under the ruling, the LG&E utility base
electric rates have increased $43.4 million (7.7%) and base gas rates have
increased $11.9 million (3.4%), on an annual basis. The rate increases
took effect on July 1, 2004. Base electric rates at KU have increased
$46.1 million (6.8%) annually. The 2004 increases were the first increases
in electric base rates for LG&E and KU in 13 and 20 years, respectively;
the last gas rate increase for the LG&E gas utility took effect in
September 2000.
With the recent installation of four combustion turbines at Trimble County,
near-term regulated load growth in Kentucky is expected to be satisfied.
However, the Integrated Resource Plan submitted by LG&E and KU to the
Kentucky Commission in April 2005 indicated the requirement for additional
base-load capacity in the longer-term. Consequently, LG&E and KU have
begun development efforts for a new base-load coal-fired unit. Trimble
County Unit 2, with a 732 Mw capacity rating, is expected to be jointly
owned by LG&E and KU (75% aggregate ownership) and IMEA and IMPA (25%
aggregate ownership). Of their 75% (549 Mw) ownership, LG&E will own 19%
(104 Mw) and KU will own 81% (445 Mw). An application for a construction
CCN was filed with the Kentucky Commission and an air permit application
was filed with the Kentucky Department of Air Quality in December 2004.
LG&E's and KU's share of the total capital cost of $885 million for Trimble
County Unit 2 is estimated to be $168 million and $717 million,
respectively, through 2010. An application for a transmission CCN is
anticipated to be filed with the Kentucky Commission during 2005.
In addition to the Trimble County Unit 2 project, another focus of major
utility investment is environmental expenditures. In order to mitigate the
declining SO2 allowance bank at KU over the next several years, KU filed
with the Kentucky Commission in December 2004 an application for a CCN to
construct four FGDs at an estimated cost of $658.9 million; a decision is
expected by late June 2005.
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.
- 26 -
Three Months Ended March 31, 2005, Compared to
Three Months Ended March 31, 2004
LG&E Results:
LG&E's net income increased $9.7 million (40%) for the three months ended
March 31, 2005, as compared to the three months ended March 31, 2004,
primarily due to the increase in electric and gas base rates effective July
1, 2004 and higher electric and gas wholesale sales.
A comparison of LG&E's revenues for the three months ended March 31, 2005,
with the three months ended March 31, 2004, reflects increases and
(decreases) which have been segregated by the following principal causes:
Cause Electric Gas
(in millions) Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ 3.6 $ 1.3
Environmental cost recovery surcharge (0.8) -
Earnings sharing mechanism (3.6) -
Demand side management cost recovery 0.1 -
LG&E/KU merger surcredit (1.1) -
Value delivery surcredit (0.3) (0.2)
Weather normalization - (0.7)
Rates and rate structure 15.3 4.3
Variation in sales volume and other 2.0 (1.9)
Total retail sales 15.2 2.8
Wholesale sales 14.4 5.9
Gas transportation - net - (0.3)
Provision for rate collections 2.3 -
Other (0.4) 0.5
Total $31.5 $ 8.9
Electric revenues increased $31.5 million (16%) in 2005 primarily due to:
- - An increase in rates and a change in rate structure ($15.3 million).
- - Higher wholesale revenues ($14.4 million), primarily due to 21% higher
prices.
Gas revenues increased $8.9 million (5%) in 2005 primarily due to:
- - Higher wholesale revenues ($5.9 million) due to 42% higher sales
volumes and 11% higher prices.
- - An increase in rates and a change in rate structure ($4.3 million).
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.
- 27 -
Fuel for electric generation increased $7.4 million (14%) in 2005
primarily due to:
- Increased cost per BTU (15% higher), resulting in $7.8 million higher
fuel costs.
- Decreased generation (1% lower), resulting in $0.4 million lower fuel
costs.
Gas supply expenses increased $4.8 million (4%) in 2005 primarily due to:
- Increased cost of purchases for wholesale sales ($5.5 million).
- Increased recovery of performance-based rates ($0.2 million).
- Decreased volume of gas delivered to the distribution system ($1.1
million).
Power purchased increased $10.1 million (35%) in 2005 primarily due to:
- Increased cost per Mwh (35% higher), primarily related to increased
intercompany purchase costs due to SO2 allowance costs.
Other operations and maintenance expenses increased $0.9 million (1%) in
2005.
Other operation expenses decreased $2.7 million (5%) in 2005 primarily
due to:
- Decreased MISO-related transmission expense ($3.0 million).
- Decreased information technology systems operations expense
($1.3 million) (charged to maintenance expenses in 2005).
- Decreased property insurance expense ($0.2 million).
- Increased steam generation operations expense ($0.6 million).
- Increased customer billing expense ($0.5 million).
- Increased gas underground storage costs ($0.5 million).
Maintenance expenses increased $3.5 million (30%) in 2005 primarily
due to:
- Increased Cane Run maintenance due to outage repairs ($1.4 million).
- Increased distribution system maintenance (including tree trimming and
underground conductor repairs) ($0.7 million).
- Increased information technology systems maintenance ($1.3 million)
(charged to operation expenses in 2004).
Property and other taxes increased $0.1 million (2%) in 2005 primarily
due to:
- Increased property tax ($0.1 million).
In total, other income (expense) - net increased $1.0 million (125%) in
2005 primarily due to:
- - Increased mark-to-market income ($0.2 million) related to energy
trading contracts.
- - Decreased miscellaneous deductions ($0.7 million).
In total, interest expense increased $1.0 million (13%) in 2005 primarily
due to:
- - Increased interest on variable-rate debt ($1.1 million).
- - Increased interest on customer deposits ($0.5 million).
- - Decreased interest costs on interest rate swaps ($0.6 million).
- 28 -
The weighted average interest rate on variable-rate bonds for the three
months ended March 31, 2005, was 1.91%, compared to 1.03% for the
comparable period in 2004.
Variances in income tax expense are largely attributable to changes in pre-
tax income and a reduction in the statutory Kentucky rate.
Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 4.3 5.6
Amortization of investment and other tax credits (1.9) (2.7)
Other differences (1.5) (0.1)
Effective income tax rate 35.9% 37.8%
The increased tax benefit in other differences is largely attributable to
the new Internal Revenue Code Section 199 Qualified Production Activities
deduction and the amortization of excess deferred income taxes, which
reflect the benefits of deferred tax reversing at lower tax rates than what
were provided.
Kentucky House Bill 272, also known as Kentucky's Tax Modernization Plan,
was signed into law on March 18, 2005. See Note 6 for additional
discussion of income taxes.
KU Results:
KU's net income increased $5.1 million (16%) for the three months ended
March 31, 2005, as compared to the three months ended March 31, 2004. The
increase was primarily due to increase in base rates effective July 1, 2004
and higher wholesale sales.
A comparison of KU's revenues for the three months ended March 31, 2005,
with the three months ended March 31, 2004, reflects increases and
(decreases) which have been segregated by the following principal causes:
Cause Electric
(in millions) Revenues
Retail sales:
Fuel supply adjustments $13.1
Environmental cost recovery surcharge 4.6
Earnings sharing mechanism (4.5)
Demand side management cost recovery 0.2
LG&E/KU merger surcredit (0.8)
Value delivery surcredit (0.2)
Rates and rate structure 13.9
Variation in sales volume and other (1.8)
Total retail sales 24.5
Wholesale sales 15.6
Provision for rate collections 0.8
Other (0.8)
Total $40.1
- 29 -
Electric revenues increased $40.1 million (16%) in 2005 primarily due to:
- - Higher wholesale revenues ($15.6 million), primarily due to 44% higher
prices and 8% higher sales volumes.
- - An increase in rates and a change in rate structure ($13.9 million).
- - Higher fuel supply adjustments ($13.1 million) due to higher cost of
fuel used for generation and purchased power.
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 FERC.
Fuel for electric generation increased $17.4 million (25%) in 2005
primarily due to:
- Increased cost per BTU (23% higher), resulting in $16.3 million higher
fuel costs.
- Increased generation (2% higher), resulting in $1.1 million higher fuel
costs.
Power purchased increased $5.0 million (12%) in 2005 primarily due to:
- Increased cost per MWh (10% higher), resulting in $4.1 million higher
costs.
- Increased volumes of MWh purchased (2% higher), resulting in $0.9
million higher costs.
Other operations and maintenance expenses increased $5.1 million (9%) in
2005.
Other operation expenses decreased $0.1 million (less than 1%) in 2005
primarily due to:
- Decreased information technology systems operation expenses ($1.1
million) (charged to maintenance expenses in 2005).
- Decreased property insurance expense ($0.2 million).
- Increased customer billing expense ($0.6 million).
- Increased MISO-related transmission expense ($0.5 million).
Maintenance expenses increased $5.2 million (44%) in 2005 primarily due
to:
- Increased E.W. Brown plant maintenance expense ($0.7 million).
- Increased Ghent plant maintenance expense ($1.7 million).
- Increased distribution system maintenance ($1.5 million) due to storm
restoration expenses.
- Increased information technology systems maintenance ($1.1 million)
(charged to operation expenses in 2004).
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In total, other income (expense) - net increased $0.6 million (150%) in
2005 primarily due to:
- - Decreased allowance for funds used during construction ($0.5 million).
In total, interest expense increased $2.2 million (51%) in 2005 primarily
due to:
- - Increased interest costs associated with the mark-to-market of the
interest rate swaps ($1.9 million). In the first quarter of 2004, a swap
was terminated, resulting in a $0.8 million gain.
The weighted average interest rate on variable-rate bonds for the three
months ended March 31, 2005, was 1.90%, compared to 1.03% for the
comparable period in 2004.
Variations in income tax expense are largely attributable to changes in
pretax income.
Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 4.6 5.8
Amortization of investment and other tax credits (0.7) (1.0)
Other differences (1.3) (1.5)
Effective income tax rate 37.6% 38.3%
Kentucky House Bill 272, also known as Kentucky's Tax Modernization Plan,
was signed into law on March 18, 2005. See Note 6 for additional
discussion of income taxes.
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
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.
At March 31, 2005, LG&E and KU are in a negative working capital position
in part because of the classification of certain variable-rate pollution
control bonds that are subject to tender for purchase at the option of the
holder as current portion of long-term debt. LG&E and KU expect to cover
any working capital deficiencies with cash flow from operations, money pool
borrowings and borrowings from Fidelia.
Construction expenditures for the three months ended March 31, 2005
amounted to $18.5 million for each Company. At LG&E, expenditures included
gas main replacements ($1.9 million), the construction of a 138Kv
transmission line ($1.1 million), and Mill Creek Unit 4 boiler tubing ($1.1
million), along with expenditures for electric and gas distribution system
construction. At KU, expenditures included Brown Unit 3 controls upgrade
($1.2 million), distribution line transformers ($1.0 million), along with
electric distribution system construction. The expenditures were financed
with internally generated funds.
- 31 -
LG&E's and KU's cash balances decreased $0.1 million and $0.7 million,
respectively, during the three months ended March 31, 2005, primarily due
to the payment of dividends, lower levels of borrowing from affiliated
companies and construction expenditures, offset by higher cash provided by
operating activities.
Variations in accounts receivable, accounts payable and inventories 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
decrease in accounts receivable at LG&E and KU was primarily due to lower
revenues at the end of the heating season. The decrease in LG&E's gas
stored underground relates to seasonal uses of gas.
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, 2005, LG&E had swaps with a combined notional
value of $211.3 million and KU had swaps with a combined notional value of
$103.0 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 2005, an LG&E interest rate swap with a notional amount of $17
million matured. The swap was fully effective upon expiration, therefore,
the impact on earnings and other comprehensive income from the swap
maturity was less than $0.1 million.
At March 31, 2005, LG&E's and KU's percentage of debt having a variable
rate, including the impact of interest rate swaps, was 41.8% ($358.0
million) and 50.4% ($375.0 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 Balance Sheets. The average
annualized interest rate for these bonds during the three months ending
March 31, 2005 was 1.96% for both the LG&E and KU bonds.
During June 2004, LG&E renewed five revolving lines of credit with banks
totaling $185 million. There was no outstanding balance under any of these
facilities at March 31, 2005. The Company expects to renew these facilities
prior to their expiration in June 2005.
- 32 -
LG&E, KU and LG&E Energy participate in an intercompany money pool
agreement. Details of the balances at March 31, 2005 and March 31, 2004
were as follows:
Total Money Amount Balance Average
(millions of $) Pool Available Outstanding Available Interest Rate
March 31, 2005:
LG&E $400.0 $35.0 $365.0 2.65%
KU 400.0 26.0 374.0 2.65
March 31, 2004:
LG&E $400.0 $ - $400.0 -%
KU 400.0 40.7 359.3 0.98
LG&E Energy maintains a revolving credit facility totaling $200 million
with E.ON North America, Inc. to ensure funding availability for the money
pool. There was no balance outstanding on this facility at March 31, 2005.
In April 2005, LG&E refinanced $40 million in existing pollution control
indebtedness. The original indebtedness, 5.90% Pollution Control Bonds,
Series X, due April 15, 2023, was discharged on May 13, 2005, using the
proceeds from the replacement indebtedness, LG&E Pollution Control Bonds,
Series HH, due February 1, 2035, which carry a variable, auction rate of
interest.
In January 2005, LG&E paid at maturity the $50 million loan from Fidelia
using proceeds from short-term loans from the money pool.
In January 2004, LG&E and KU made discretionary contributions to their
pension plans of $34.5 million and $43.4 million, respectively. No
discretionary contributions to the pension plans are planned for either
LG&E or KU for 2005, but one or both Companies may make a discretionary
contribution to the other post-retirement benefit plans.
Security ratings as of March 31, 2005, were:
LG&E KU
Moody's S&P Moody's S&P
First mortgage bonds A1 A- A1 A
Preferred stock Baa1 BBB- Baa1 BBB-
Commercial paper P-1 A-2 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.
- 33 -
Capitalization ratios at March 31, 2005, and December 31, 2004, follow:
LG&E KU
March 31, December 31, March 31,December 31,
2005 2004 2005 2004
Long-term debt
(including current portion) 31.7% 30.5% 22.2% 22.2%
Long-term debt to affiliated
company (including current
portion) 11.9 14.1 18.9 18.8
Notes payable to affiliated
companies 1.9 3.0 1.5 2.0
Preferred stock 3.7 3.6 2.2 2.2
Common equity 50.8 48.8 55.2 54.8
Total 100.0% 100.0% 100.0% 100.0%
New Accounting Pronouncements
For a discussion of new accounting pronouncements and their impacts on LG&E
and KU, see Part I - Item 1, Notes to Financial Statements, Note 7.
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, 2004; and to
Part I - Item 1, Notes to Financial Statments, Notes 5 and 10, and Part II
- - Item 1, Legal Proceedings herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
LG&E's and KU's 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.
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.
- 34 -
The potential change in interest expense associated with a 1% change in
base interest rates of LG&E's and KU's unswapped variable debt is estimated
at $3.58 million and $3.75 million, respectively, at March 31, 2005. LG&E's
and KU's exposure to floating interest rates did not materially change
during the first three months of 2005.
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 $22.0 million as of March 31, 2005. 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 $1.0 million as
of March 31, 2005. These estimates are derived from third-party
valuations. Changes in the market values of these swaps, if held to
maturity, will have no effect 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. LG&E and KU
have recognized an additional minimum liability as prescribed by SFAS No.
87, Employers' Accounting for Pensions because the accumulated benefit
obligation exceeds the fair value of their plans' assets. The liabilities
were recorded as a reduction to other comprehensive income, and did not
affect net income. The amount of the liability depends upon the discount
rate, the asset returns and contributions made by the Companies to the
plans. If the fair value of the plans' assets exceeds the accumulated
benefit obligation, the recorded liabilities will be reduced and other
comprehensive income will be restored in the balance sheet.
A 1% increase or decrease in the assumed discount rate could have an
approximate $39.9 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 $26.8 million positive or negative
impact to the accumulated benefit obligation of KU.
In January 2004, LG&E and KU made discretionary contributions to their
pension plans of $34.5 million and $43.4 million, respectively. No
discretionary contributions to the pension plans are planned for either
LG&E or KU for 2005, but one or both Companies may make a discretionary
contribution to the other post-retirement benefit plans.
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, 2005, and 2004.
Trading volumes are allocated evenly between LG&E and KU.
Three Months Ended
March 31,
2005 2004
(in millions)
Fair value of contracts at beginning of
period, net asset/(liability) $ (0.2) $ 0.6
Fair value of contracts when entered
into during the period - -
Contracts realized or otherwise
settled during the period 0.2 (0.2)
Changes in fair value due to changes in assumptions - 0.2
Fair value of contracts at end of period,
net asset $ - $ 0.6
- 35 -
No changes to valuation techniques for energy trading and risk management
activities occurred during 2005 or 2004. Changes in market pricing,
interest rate and volatility assumptions were made during all periods. The
outstanding mark-to-market value is sensitive to changes in prices, price
volatilities, and interest rates. The Companies estimate that a movement
in prices of $1 and a change in interest and volatilities of 1% would not
result in a change of a material amount. All contracts outstanding at
March 31, 2005, have a maturity of less than one year and are valued using
prices actively quoted for proposed or executed transactions or quoted by
brokers.
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, 2005, 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 have concluded that the Companies' disclosure
controls and procedures are effective as of the end of the period covered
by this report.
LG&E and KU are not accelerated filers under the Sarbanes-Oxley Act of 2002
and associated rules (the "Act") and consequently anticipate issuing
Management's Report on Internal Control over Financial Reporting pursuant
to Section 404 of the Act in their first periodic report covering the
fiscal year ended December 31, 2006 as permitted by SEC rulemaking.
In preparation for required reporting under Section 404 of the Sarbanes-
Oxley Act of 2002, the Companies are conducting a thorough review of their
internal controls over financial reporting, including disclosure controls
and procedures. Based on this review, the Companies have made internal
controls enhancements and will continue to make future enhancements to
their internal control over financial reporting. There has been no change
in the Companies' internal control over financial reporting that occurred
during the fiscal quarter ended March 31, 2005, that has materially
affected, or is reasonably likely to materially affect, the Companies'
internal control over financial reporting.
- 36 -
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, 2004: 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 in Note 11. Reference is also made to the matters
described in Notes 5 and 10 of Part I, Item 1 of this 10-Q. 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.
Other
In the normal course of business, other lawsuits, claims, environmental
actions, and other governmental proceedings arise against LG&E and KU. To
the extent that damages are assessed in any of these lawsuits, LG&E and KU
believe that their insurance coverage is adequate. Management, after
consultation with legal counsel, does not anticipate that liabilities
arising out of other currently pending or threatened lawsuits and claims
will have a material adverse effect on LG&E's or KU's financial position or
results of operations, respectively.
Item 6. Exhibits.
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 302 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
Certain instruments defining the rights of holders of certain long-term
debt of LG&E or KU have not been filed with the SEC but will be furnished
to the SEC upon request.
- 37 -
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, 2005 /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, 2005 /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)
- 38 -