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 June 30, 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 July 31, 2005,
all held by LG&E Energy LLC
Kentucky Utilities Company
37,817,878 shares, without par value, as of July 31, 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.
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
EPA Environmental Protection Agency
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
ITP Independent Transmission Provider
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
SOA The Sarbanes-Oxley Act of 2002
VDT Value Delivery Team Process
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. 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 36
ITEM 4. CONTROLS AND PROCEDURES. 39
PART II
ITEM 1. LEGAL PROCEEDINGS. 40
ITEM 6. EXHIBITS 41
SIGNATURES 43
EXHIBITS 44
Part I. Financial Information - Item 1. Financial Statements (Unaudited)
Louisville Gas and Electric Company
Statements of Income
(Unaudited)
(Millions of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2005 2004 2005 2004
OPERATING REVENUES:
Electric $228.2 $192.5 $457.2 $390.8
Gas 52.5 43.7 225.1 207.4
Total operating revenues 280.7 236.2 682.3 598.2
OPERATING EXPENSES:
Fuel for electric generation 68.2 47.8 128.5 100.6
Power purchased 28.2 17.3 67.2 46.2
Gas supply expenses 35.6 31.0 171.2 161.8
Other operation and maintenance expenses 65.0 77.3 139.3
151.7
Depreciation and amortization 31.2 28.2 62.0 55.7
Total operating expenses 228.2 201.6 568.2 516.0
NET OPERATING INCOME 52.5 34.6 114.1 82.2
Other expense (income) - net 0.1 0.1 (0.1) 0.8
Interest expense (Note 3) 5.9 5.2 11.8 10.1
Interest expense to affiliated companies
(Note 9) 2.8 3.0 5.9 6.1
INCOME BEFORE INCOME TAXES 43.7 26.3 96.5 65.2
Federal and state income taxes (Note 6) 15.7 9.2 34.7
23.9
NET INCOME $ 28.0 $ 17.1 $ 61.8 $ 41.3
The accompanying notes are an integral part of these financial statements.
Statements of Retained Earnings
(Unaudited)
(Millions of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2005 2004 2005 2004
Balance at beginning of period $538.2 $521.3 $534.0 $497.5
Net income 28.0 17.1 61.8 41.3
Subtotal 566.2 538.4 595.8 538.8
Cash dividends declared on stock:
5% cumulative preferred 0.3 0.3 0.5 0.5
Auction rate cumulative preferred 0.5 0.2 0.9 0.4
Common 10.0 21.0 39.0 21.0
Subtotal 10.8 21.5 40.4 21.9
Balance at end of period $555.4 $516.9 $555.4 $516.9
The accompanying notes are an integral part of these financial statements.
Louisville Gas and Electric Company
Balance Sheets
(Unaudited)
(Millions of $)
ASSETS
June 30, December 31,
2005 2004
CURRENT ASSETS:
Cash and cash equivalents $ 4.8 $ 6.8
Accounts receivable -
less reserve of $1.2 million and $0.8 million as of
June 30, 2005 and December 31, 2004,
respectively 140.9 167.0
Materials and supplies - at average cost:
Fuel (predominantly coal) 27.6 21.8
Gas stored underground 19.3 77.5
Other 27.0 26.1
Prepayments and other 3.3 3.9
Total current assets 222.9 303.1
OTHER PROPERTY AND INVESTMENTS -
less reserve of less than $0.1 million as of
June 30, 2005 and December 31, 2004 0.6 0.5
UTILITY PLANT:
At original cost 3,966.8 3,915.8
Less: reserve for depreciation 1,459.4 1,396.3
Net utility plant 2,507.4 2,519.5
DEFERRED DEBITS AND OTHER ASSETS:
Restricted cash 13.1 10.9
Unamortized debt expense 8.4 8.4
Regulatory assets (Note 5) 73.9 91.9
Other 31.8 32.2
Total deferred debits and other assets 127.2 143.4
Total assets $2,858.1 $2,966.5
The accompanying notes are an integral part of these financial statements.
Louisville Gas and Electric Company
Balance Sheets (cont.)
(Unaudited)
(Millions of $)
CAPITALIZATION AND LIABILITIES
June 30, December 31,
2005 2004
CURRENT LIABILITIES:
Current portion of mandatorily
redeemable preferred stock $ 1.3 $ 1.3
Current portion of long-term debt (Note 8) 246.2 246.2
Current portion of long-term debt to
affiliated company (Note 8) - 50.0
Notes payable to affiliated companies (Note 8) 20.8 58.2
Accounts payable 66.9 106.1
Accounts payable to affiliated companies (Note 9) 60.8
31.7
Accrued income taxes - 6.2
Customer deposits 16.2 14.0
Other 9.9 18.5
Total current liabilities 422.1 532.2
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 318.7 347.2
Investment tax credit, in process of amortization 44.1
46.2
Accumulated provision for pensions
and related benefits 122.1 120.6
Customer advances for construction 9.7 10.6
Asset retirement obligation 10.6 10.3
Regulatory liabilities (Note 5):
Accumulated cost of removal of utility plant 216.2 220.2
Deferred income taxes - net (Note 6) 54.2 37.2
Other 9.7 15.0
Other 38.9 29.4
Total deferred credits and other liabilities 824.2 836.7
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 (52.8) (45.6)
Retained earnings 555.4 534.0
Total common equity 967.0 952.8
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 1,611.8 1,597.6
Total capital and liabilities $2,858.1 $2,966.5
The accompanying notes are an integral part of these financial statements.
Louisville Gas and Electric Company
Statements of Cash Flows
(Unaudited)
(Millions of $)
Six Months Ended
June 30,
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 61.8 $ 41.3
Items not requiring cash currently:
Depreciation and amortization 62.0 55.7
Value delivery team amortization 15.1 15.1
Change in fair value of derivative instruments 4.0 (6.1)
Deferred income taxes - net (11.5) 4.9
Investment tax credit - net (2.1) (2.8)
Other (4.7) 5.5
Changes in current assets and liabilities-net 55.5 (19.6)
Pension funding (Note 11) - (34.5)
Provision for post-retirement benefits (2.6) (8.0)
Gas supply clause receivable, net 2.0 8.3
Earnings sharing mechanism receivable 2.1 2.4
Litigation settlement - 7.1
Other (2.5) 9.3
Net cash provided by operating activities 179.1 78.6
CASH FLOWS USED IN INVESTING ACTIVITIES:
(Purchase) sale of long-term investments (0.1) -
Change in restricted cash (2.2) (6.5)
Construction expenditures (51.0) (64.9)
Net cash used for investing activities (53.3) (71.4)
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) (50.0)
Short-term borrowings from affiliated company (Note 8) - 260.5
Repayment of short-term borrowings
from affiliated company (37.4) (314.9)
Payment of dividends (40.4) (21.9)
Other - (0.1)
Net cash used for financing activities (127.8) (1.4)
CHANGE IN CASH AND CASH EQUIVALENTS (2.0) 5.8
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6.8 1.7
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4.8 $ 7.5
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $51.6 $33.1
Interest on borrowed money 10.9 8.5
Interest to affiliated companies on borrowed money 6.4 5.3
The accompanying notes are an integral part of these financial statements.
Louisville Gas and Electric Company
Statements of Other Comprehensive Income
(Unaudited)
(Millions of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2005 2004 2005 2004
Net income $28.0 $17.1 $61.8 $41.3
Income Taxes - Minimum Pension
Liability (Note 6) - - (1.1) -
Gain (loss) on derivative instruments and
hedging activities - net of tax benefit
/(expense) of $5.0, $(4.8), $3.9 and
$(2.4),respectively (Note 3) (7.7) 7.3 (6.1) 3.7
Other comprehensive income (loss),
net of tax (7.7) 7.3 (7.2) 3.7
Comprehensive income $20.3 $24.4 $54.6 $45.0
The accompanying notes are an integral part of these financial statements.
Kentucky Utilities Company
Statements of Income
(Unaudited)
(Millions of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2005 2004 2005 2004
OPERATING REVENUES $265.2 $232.4 $551.5 $479.7
OPERATING EXPENSES:
Fuel for electric generation 84.0 67.7 171.5 137.7
Power purchased 50.0 30.7 96.3 72.0
Other operation and maintenance
expenses 67.8 57.8 126.2 112.2
Depreciation and amortization 29.2 25.9 57.7 51.2
Total operating expenses 231.0 182.1 451.7 373.1
NET OPERATING INCOME 34.2 50.3 99.8 106.6
Other (income) - net (1.8) (1.9) (3.1) (2.9)
Interest expense (Note 3) 4.2 3.7 7.0 4.4
Interest expense to affiliated companies
(Note 9) 3.7 3.5 7.2 7.1
NET INCOME BEFORE INCOME TAXES 28.1 45.0 88.7 98.0
Federal and state income taxes (Note 6)10.4 17.4 33.4 38.0
NET INCOME $ 17.7 $ 27.6 $ 55.3 $ 60.0
The accompanying notes are an integral part of these financial statements.
Statements of Retained Earnings
(Unaudited)
(Millions of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2005 2004 2005 2004
Balance at beginning of period $666.4 $623.1 $659.4 $591.2
Net income 17.7 27.6 55.3 60.0
Subtotal 684.1 650.7 714.7 651.2
Cash dividends declared on stock:
4.75% cumulative preferred 0.2 0.2 0.5 0.4
6.53% cumulative preferred 0.3 0.3 0.6 0.6
Common 10.0 21.0 40.0 21.0
Subtotal 10.5 21.5 41.1 22.0
Balance at end of period $673.6 $629.2 $673.6 $629.2
The accompanying notes are an integral part of these financial statements.
Kentucky Utilities Company
Balance Sheets
(Unaudited)
(Millions of $)
ASSETS
June 30, December 31,
2005 2004
CURRENT ASSETS:
Cash and cash equivalents $ 4.0 $ 4.6
Accounts receivable - less reserve of $0.6 million
as of June 30, 2005 and December 31, 2004 107.7 112.6
Materials and supplies - at average cost:
Fuel (predominantly coal) 57.3 52.2
Other 29.3 28.0
Prepayments and other 5.9 9.9
Total current assets 204.2 207.3
OTHER PROPERTY AND INVESTMENTS -
less reserve of $0.1 million as of June 30,
2005 and December 31, 2004 21.7 20.5
UTILITY PLANT:
At original cost 3,756.1 3,712.1
Less: reserve for depreciation 1,462.7 1,415.0
Net utility plant 2,293.4 2,297.1
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4.3 4.7
Regulatory assets (Note 5) 68.9 61.4
Long-term derivative asset 1.9 6.1
Other 41.1 13.3
Total deferred debits and other assets 116.2 85.5
Total assets $2,635.5 $2,610.4
The accompanying notes are an integral part of these financial statements.
Kentucky Utilities Company
Balance Sheets (cont.)
(Unaudited)
(Millions of $)
CAPITALIZATION AND LIABILITIES
June 30, December 31,
2005 2004
CURRENT LIABILITIES:
Current portion of long-term debt (Note 8) $ 123.1 $ 87.1
Current portion of long-term notes to
affiliated company (Note 8) 75.0 75.0
Notes payable to affiliated company (Note 8) 93.1 34.8
Accounts payable 57.7 77.9
Accounts payable to affiliated companies (Note 9) 68.0 32.8
Accrued income taxes 3.7 5.9
Customer deposits 16.2 15.0
Other 2.6 15.4
Total current liabilities 439.4 343.9
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 267.1 282.6
Investment tax credit, in process of amortization 3.0 3.8
Accumulated provision for pensions and
related benefits 78.7 77.9
Asset retirement obligation 21.5 21.0
Regulatory liabilities (Note 5):
Accumulated cost of removal of utility plant 273.7 266.8
Deferred income taxes - net (Note 6) 30.9 19.3
Other 9.9 5.4
Other 15.4 17.0
Total deferred credits and other liabilities 700.2 693.8
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 660.4 647.3
Undistributed subsidiary earnings 13.2 12.1
Total retained earnings 673.6 659.4
Total common equity 982.8 968.9
Cumulative preferred stock 39.7 39.7
Long-term debt (Note 8) 215.4 306.1
Long-term debt to affiliated company (Note 8) 258.0 258.0
Total capitalization 1,495.9 1,572.7
Total capital and liabilities $2,635.5 $2,610.4
The accompanying notes are an integral part of these financial statements.
Kentucky Utilities Company
Statements of Cash Flows
(Unaudited)
(Millions of $)
Six Months Ended
June 30,
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55.3 $ 60.0
Items not requiring cash currently:
Depreciation and amortization 57.7 51.2
Value delivery team amortization 5.9 5.9
Change in fair value of derivative instruments (4.7) 0.1
Other (3.6) 13.9
Changes in current assets and liabilities 3.7 (52.9)
Earnings sharing mechanism receivable 3.1 0.3
Pension funding (Note 11) - (43.4)
Provision for post-retirement benefits 0.8 (3.4)
Litigation settlement - 11.6
Fuel adjustment clause receivable (13.3) 2.9
Other (2.0) 3.4
Net cash provided by operating activities 102.9 49.6
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of long-term investments - (1.3)
Construction expenditures (44.0) (76.4)
Net cash flows used for investing activities (44.0) (77.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from affiliated company (Note 8) - 50.0
Short-term borrowings from affiliated company (Note 8) 58.3 255.0
Repayment of long-term debt (50.0) -
Repayment of short-term borrowings
from affiliated company (Note 8) - (245.1)
Retirement of pollution control bonds - (4.9)
Repayment of other borrowings (Note 8) (26.7) -
Payment of dividends (41.1) (22.0)
Net cash flows used for financing activities (59.5) 33.0
CHANGE IN CASH AND CASH EQUIVALENTS (0.6) 4.9
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4.6 4.9
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4.0 $ 9.8
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $39.8 $21.3
Interest on borrowed money 7.8 7.6
Interest to affiliated companies on borrowed money 7.1 6.1
The accompanying notes are an integral part of these financial statements.
Kentucky Utilities Company
Statements of Other Comprehensive Income
(Unaudited)
(Millions of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2005 2004 2005 2004
Net income $17.7 $27.6 $55.3 $60.0
Income Taxes - Minimum Pension Liability
(Note 6) - - (0.3) -
Other comprehensive loss, net of tax - - (0.3) -
Comprehensive income $17.7 $27.6 $55.0 $60.0
The accompanying notes are an integral part of these financial statements.
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 condensed 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.
During the second quarter of 2005, LG&E and KU made out-of-period
adjustments for estimated over/under collection of ECR revenues to be
billed in subsequent periods. The adjustment was immaterial during all
reporting periods involved (March 2003 through October 2004 for LG&E
and May 2003 through January 2005 for KU). As a result, LG&E revenues
were increased $4.8 million and KU revenues were decreased $2.4 million
in the current period results of operations. Net income in the current
period was increased $2.9 million for LG&E and was reduced $1.5 million
for KU.
The accompanying financial statements for the three months and six
months ended June 30, 2004, have been revised to conform to certain
reclassifications in the current three months and six months ended June
30, 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 June 30, 2004, increased by $9.4 million and $17.5
million, and for the six months ended June 30, 2004, increased by $24.4
million and $38.5 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 June 30, 2004, decreased $0.2 million and
$0.1 million, and for the six months ended June 30, 2004, decreased
$0.5 million and $0.5 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.
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 June 30, 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 2.18% at June 30, 2005. The swap
agreements in effect at June 30, 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 loss of $12.7
million and $10.0 million for the three months and six months ended
June 30, 2005, respectively, recorded in other comprehensive income.
Upon expiration of these hedges, the amount recorded in other
comprehensive income will be reclassified into earnings. The amount
expected to be reclassified from other comprehensive income to earnings
in the next twelve months is immaterial. A deposit in the amount of
$13.1 million, used as collateral for an $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. As a
result, the impact on earnings and other comprehensive income from the
swap maturity was less than $0.1 million.
As of June 30, 2005, KU was party to one interest rate swap agreement
with a notional amount of $53.0 million. Under this swap agreement, KU
paid a variable rate based on the LIBOR index of 5.34%, and received a
fixed rate of 7.92% at June 30, 2005. The swap agreement in effect at
June 30, 2005 has been designated as a fair value hedge and matures in
2007. In June 2005, an interest rate swap with a notional amount of $50
million was terminated by the counterparty pursuant to the terms of the
swap agreement. KU received a payment of $1.9 million in consideration
for the termination of the agreement. KU also called the underlying
debt (First Mortgage Bond Series R) and paid a call premium of $1.9
million. The swap was fully effective upon termination. No impact on
earnings occurred as a result of the bond call and related swap
termination.
During the three months and six months ended June 30, 2005, the effect
of marking these financial instruments and the underlying debt to
market resulted in a pretax loss of $0.2 million and a pretax gain of
$0.5 million, respectively, 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 June 30, 2005, KU's debt reflects a $3.5 million mark-
to-market adjustment.
4. Segments of Business
LG&E's revenues, net income and total assets by business segment for
the three months and six months ended June 30, 2005 and 2004, follow:
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2005 2004 2005 2004
LG&E Electric
Revenues $228.2 $192.5 $457.2 $390.8
Net income 30.0 20.4 53.8 36.4
Total assets 2,404.3 2,417.2 2,404.3 2,417.2
LG&E Gas
Revenues 52.5 43.7 225.1 207.4
Net income (2.0) (3.3) 8.0 4.9
Total assets 453.8 443.6 453.8 443.6
Total
Revenues 280.7 236.2 682.3 598.2
Net income 28.0 17.1 61.8 41.3
Total assets 2,858.1 2,860.8 2,858.1 2,860.8
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 June 30, 2005 and December 31, 2004:
Louisville Gas and Electric Company
(Unaudited)
June 30, December 31,
(in millions) 2005 2004
VDT Costs $ 22.6 $ 37.7
Unamortized loss on bonds 21.2 20.3
ARO 7.3 6.9
Merger surcredit 4.1 4.8
ESM - 2.1
Rate case expenses 0.9 1.1
FAC 3.5 0.8
ECR 2.1 -
Gas supply adjustments due from customers 9.2 13.3
Gas performance-based ratemaking 2.0 3.7
Manufactured gas sites 1.0 1.2
Total regulatory assets $ 73.9 $ 91.9
Accumulated cost of removal of utility
plant $216.2 $220.2
Deferred income taxes - net (Note 6) 54.2 37.2
ARO 0.1 0.1
ECR - 4.0
DSM 3.3 2.5
Gas supply adjustments due to customers 6.3 8.4
Total regulatory liabilities $280.1 $272.4
LG&E currently earns a return on all regulatory assets except for gas
supply adjustments, ESM, FAC, ECR 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.
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 higher rates than the current statutory rate. See Note 6.
The following regulatory assets and liabilities were included in KU's
balance sheets as of June 30, 2005 and December 31, 2004:
Kentucky Utilities Company
(Unaudited)
June 30, December 31,
(in millions) 2005 2004
VDT costs $ 8.8 $ 14.7
Unamortized loss on bonds 11.4 11.4
ARO 13.7 12.8
Merger surcredit 3.2 3.7
ESM - 3.1
Rate case expenses 0.9 1.1
FAC 22.8 9.4
ECR 3.3 -
Deferred storm costs 3.2 3.6
Post retirement and pension 1.3 1.2
Management audit expenses 0.3 0.4
Total regulatory assets $ 68.9 $ 61.4
Accumulated cost of removal of utility
plant $273.7 $266.8
Deferred income taxes - net (Note 6) 30.9 19.3
ARO 1.6 1.4
ECR 5.3 1.2
FAC - 0.1
DSM 1.9 1.6
Spare parts 1.1 1.1
Total regulatory liabilities $314.5 $291.5
KU currently earns a return on all regulatory assets except for ESM,
FAC, and ECR, 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 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 higher rates than the current statutory rate. See Note 6.
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 Attorney General of Kentucky ("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.
During Spring 2005, LG&E and KU responded to additional information
requests from the AG. LG&E and KU have also responded to
investigative requests for information from the Kentucky Commission.
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 the ultimate impact of,
if any, or any possible future actions of the AG or the Kentucky
Commission arising out 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.
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 are required to 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. Prior to September 30, 2005, LG&E
and KU will file a plan with the Kentucky Commission in accordance with
the requirements of the settlement agreement.
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
and KU's compliance plans 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 were
issued in June 2005, granting approval of the CCN and amendments to
LG&E's and KU's compliance plans.
During the second quarter of 2005, LG&E and KU made out-of-period
adjustments for estimated over/under collection of ECR revenues to be
billed in subsequent periods. The adjustment was immaterial during all
reporting periods involved (March 2003 through October 2004 for LG&E
and May 2003 through January 2005 for KU). As a result, LG&E revenues
were increased $4.8 million and KU revenues were decreased $2.4 million
in the current period results of operations. Net income in the current
period was increased $2.9 million for LG&E and was reduced $1.5 million
for KU.
IRP
In April 2005, LG&E and KU filed under Case No. 2005-00162, the 2005
Joint Integrated Resource Plan (IRP) with the Kentucky Commission. The
IRP is filed triennially and provides historical and projected demand,
resource, and financial data, and other operating performance and
system information. Data discovery is expected to continue through
September 2005.
MISO
The MISO implemented a day-ahead and real-time market (MISO Day 2),
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. The MISO filed with FERC a mechanism
for recovery of costs for the congestion management system proposing
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 these regional
market-related 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 Companies'
exit from the MISO, under certain conditions. The MISO filed its own
testimony and cost benefit analysis in December 2003. The Kentucky
Commission requested additional testimony on the MISO's Market Tariff
filing. This additional testimony was received and a hearing before
the Kentucky Commission was held in July 2005. Additional post-hearing
data requests are expected to be submitted in August with an order
expected in the fourth quarter 2005.
Should LG&E and KU be ordered to exit the MISO, the MISO may seek to
impose an aggregate exit fee up to $40 million, or seek recovery of
other amounts, depending on the timing and circumstances of actual
withdrawal. 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
and benefits.
At this time, LG&E and KU cannot predict the outcome or effects of the
various 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. Further, ultimate
financial consequences (changes in transmission revenues and costs)
associated with the April 2005 implementation of transmission day-ahead
and real-time 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.
FERC SMD NOPR
In July 2002, the FERC issued a NOPR in Docket No. RM01-12-000 which
would substantially alter the regulations governing the nation's
wholesale electricity markets by establishing a common set of rules,
known as SMD. The SMD NOPR would require each public utility that owns,
operates, or controls interstate transmission facilities to become an
ITP, belong to an RTO that is an ITP, or contract with an ITP for
operation of its transmission assets. It would also establish a
standardized congestion management system, real-time and day-ahead
energy markets, and a single transmission service for network and point-
to-point transmission customers. On July 19, 2005, the FERC issued an
order terminating the SMD proceeding. FERC noted that the industry has
made significant progress in the voluntary development of the RTO/ITP
functions and asserted its intent to consider revisions to the Order
888 pro-forma Open Access Transmission Tariffs to reflect the current
experience with open transmission over the last decade.
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. LG&E and KU responded to the Kentucky
Commission's first set of data requests at the end of March 2005 and to
a second set of data requests in May 2005. The Commission held a
Technical Conference on June 14, 2005, in which all parties
participated in a panel discussion. A final report is due in August
2005 from the Kentucky Commission to the Governor.
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
higher rates than the current statutory rate. Without some form of
adjustment, 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.
LG&E and KU filed applications with the Kentucky Commission requesting
approval of accounting treatment to establish and amortize a regulatory
liability for net excess deferred income tax balances. Both LG&E and KU
are amortizing their depreciation-related excess deferred income tax
balances under the average rate assumption method. The average rate
assumption method matches the amortization of the excess deferred
income taxes with the life of the timing differences to which it
relates. Excess deferred income tax balances related to non-
depreciation timing differences will be expensed in the current year
due to their immaterial amount. In June 2005, LG&E and KU each received
orders from the Kentucky Commission authorizing its prescribed methods
to establish and amortize a regulatory liability for its excess
deferred income tax balance.
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 have
received the Income Tax Examination Changes for the years 1999 to 2001.
As a result, LG&E and KU expect to receive immaterial refunds for these
years, subject to review by the Congressional Joint Committee on
Taxation.
LG&E is also under a Kentucky sales and use tax audit for the periods
October 1, 1997 through December 31, 2001. An initial assessment of
$1.1 million has been received and will be protested as the Company
believes it has meritorious defenses for the issues raised during the
examination.
The Company is presently unable to assess the ultimate impact of the
results of audit assessments by taxing authorities 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 currently believe that any of these matters will have a material
adverse effect on financial position or results of operations.
7. New Accounting Pronouncements
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 six months
ended June 30, 2005, LG&E and KU recognized $0.8 million and $0.4
million, respectively, in tax benefits related to this deduction.
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 June 30, 2005 was 2.50% for LG&E and 2.64% for
KU.
During June 2005, LG&E renewed five revolving lines of credit with
banks totaling $185 million. There was no outstanding balance under
any of these facilities at June 30, 2005. The Company expects to renew
these facilities prior to their expiration in June 2006.
LG&E, KU and LG&E Energy participate in an intercompany money pool
agreement. Details of the balances at June 30, 2005, and June 30, 2004,
were as follows:
Total Money Amount Balance Average
($ in millions) Pool Available Outstanding Available Interest Rate
June 30, 2005:
LG&E $400.0 $20.8 $379.2 3.06%
KU $400.0 $93.1 $306.9 3.06%
June 30, 2004:
LG&E $400.0 $26.0 $374.0 1.04%
KU $400.0 $53.2 $346.8 1.04%
LG&E Energy maintains a revolving credit facility totaling $200 million
with an affiliated company, E.ON North America, Inc., to ensure funding
availability for the money pool. The balance outstanding on this
facility at June 30, 2005 was $159.7 million.
Redemptions and maturities of long-term debt year-to-date through June
30, 2005, are summarized below:
($ in millions)
Principal Secured/
Year Company Description Amount Rate Unsecured Maturity
2005 LG&E Pollution control bonds $40.0 5.90% Secured Apr 2023
2005 LG&E Due to Fidelia $50.0 1.53% Secured Jan 2005
2005 KU First mortgage bonds $50.0 7.55% Secured Jun 2025
Issuances of long-term debt year-to-date through June 30, 2005, are
summarized below:
($ in millions)
Principal Secured/
Year Company Description Amount Rate Unsecured Maturity
2005 LG&E Pollution control bonds $40.0 Variable Secured Feb 2035
The proceeds of the 2005 loan at LG&E were used to refinance existing
pollution control bonds.
In May 2005, KU repaid a $26.7 million loan against the cash surrender
value of life insurance policies.
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 and six months ended
June 30, 2005 and 2004, were as follows:
Three Six
months ended months ended
June 30, June 30,
(in millions) 2005 2004 2005 2004
LG&E
Electric operating revenues
from KU $21.0 $ 8.4 $46.8 $30.5
Purchased power from KU 18.6 9.1 48.7 30.7
KU
Electric operating revenues
from LG&E $18.6 $ 9.1 $48.7 $30.7
Purchased power from LG&E 21.0 8.4 46.8 30.5
Interest Charges
LG&E and KU intercompany interest expense for the three months and six
months ended June 30, 2005 and 2004, were as follows:
Three Six
months ended months ended
June 30, June 30,
(in millions) 2005 2004 2005 2004
LG&E intercompany interest expense $2.8 $3.0 $5.9 $6.1
KU intercompany interest expense $3.7 $3.5 $7.2 $7.1
Other Intercompany Billings
Other intercompany billings related to LG&E and KU for the three months
and six months ended June 30, 2005 and 2004, were as follows:
Three Six
months ended months ended
June 30, June 30,
(in millions) 2005 2004 2005 2004
LG&E Services billings to LG&E $75.8 $60.4 $108.5 $98.6
LG&E Services billings to KU 75.6 44.7 101.5 75.4
LG&E billings to LG&E Services 0.6 1.5 5.3 4.5
KU billings to LG&E Services 0.3 1.1 3.6 3.9
LG&E billings to KU 14.4 16.9 28.5 33.5
KU billings to LG&E 9.0 1.9 13.0 3.4
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 and Quarterly Report on Form 10-Q for the three
months ended March 31, 2005. See Notes 3 and 11 to the Companies'
Annual Report on Form 10-K and Note 10 to the Companies' Quarterly
Report on Form 10-Q for the three months ended March 31, 2005 for
information regarding such commitments or contingencies.
LITIGATION
In May 2004, OMU commenced litigation against KU concerning a long-term
power supply contract. To date, OMU has claimed approximately $6
million in damages for periods through early 2004, and may claim
further amounts for later-occurring periods. OMU has additionally
requested injunctive and other relief, including a declaration that KU
is in material breach of the contract. In March 2005, the FERC denied a
rehearing request by KU regarding the FERC's December 2004 decision to
decline to exercise exclusive jurisdiction regarding certain issues in
dispute. In July 2005, the district court resolved a summary judgment
motion of KU in OMU's favor, ruling that a contractual provision grants
OMU the ability to terminate the contract without cause upon sufficient
prior notice. This case is currently in the discovery stage and a
trial schedule has not yet been established.
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 for 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 the new NOX controls.
On March 10, 2005, EPA issued the final Clean Air Interstate Rule
(CAIR) which requires substantial additional reductions in SO2 and NOX
emissions from electric generating units. The CAIR rule provides for a
two-phased reduction program with Phase I reductions in NOX and SO2
emissions in 2009 and 2010, respectively, and Phase II reductions in
2015. On March 15, 2005, EPA issued a related regulation, the final
Clean Air Mercury Rule (CAMR), which requires substantial mercury
reductions from electric generating units. CAMR also provides for a
two-phased reduction, with the Phase I target in 2010 achieved as a "co-
benefit" of the controls installed to meet CAIR. Additional control
measures will be required to meet the Phase II target in 2018. Both
CAIR and CAMR establish a cap and trade framework that can be used for
compliance unless the state chooses another approach.
In order to meet these new regulatory requirements, 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
September 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 the new SO2 controls.
LG&E and KU are also monitoring several other air quality matters which
may potentially impact coal-fired power plants, including EPA's revised
air quality standards for ozone and particulate matter, and measures to
implement EPA's regional haze rule.
From time to time, LG&E and KU have conducted negotiations with the
relevant regulatory authorities to address various environmental-
related matters, including: remedial measures aimed at controlling
particulate matter emissions from LG&E's Mill Creek plant; settlement
of claims relating to a fuel oil spill at KU's E.W. Brown plant;
liability for cleanup of off-site facilities that allegedly handled
materials associated with company operations; and investigation and
cleanup of company properties including former LG&E and KU MGP sites.
Based on negotiations to date, management does not anticipate that any
of the liabilities arising out of any of these matters will have a
material adverse affect on LG&E's or KU's financial position or results
of operations.
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 presently 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
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 six months
of 2005. Discussions are on-going related to the extension or
replacement of the contract, including whether any such future contract
will be at cost or market-based rates, and whether the purchasing party
will continue to be the shareholding utility, such as KU. The outcome
of such discussions cannot be predicted at this time.
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 and six
months ended June 30, 2005 and 2004:
LG&E
Three Six
months ended months ended
June 30, June 30,
(in millions) 2005 2004 2005 2004
Pension and Other Benefit Plans:
Components of net period benefit cost
Service cost $ 1.4 $ 0.9 $ 3.1 $ 3.0
Interest cost 5.6 4.7 12.1 15.3
Expected return on plan assets (5.2) (4.3) (11.2) (13.9)
Amortization of prior service
cost 1.2 - 2.5 -
Amortization of transition
obligation - 0.9 - 2.9
Recognized actuarial loss 0.6 0.5 1.4 1.6
$ 3.6 $ 2.7 $ 7.9 $ 8.9
KU
Three Six
months ended months ended
June 30, June 30,
(in millions) 2005 2004 2005 2004
Pension and Other Benefit Plans:
Components of net period benefit cost
Service cost $ 1.7 $ 1.1 $ 3.4 $ 3.5
Interest cost 4.1 3.5 8.5 11.2
Expected return on plan assets (3.8) (3.2) (7.8) (10.1)
Amortization of prior service
cost 0.3 0.2 0.7 0.5
Amortization of transition
obligation 0.2 0.3 0.3 0.8
Recognized actuarial loss 0.6 0.4 1.2 1.2
$ 3.1 $ 2.3 $ 6.3 $ 7.1
In January 2004, LG&E and KU made discretionary contributions to the
pension plans of $34.5 million and $43.4 million, respectively. No
discretionary contributions to the pension plans are currently
anticipated for either LG&E or KU for 2005. LG&E and KU contributed
$0.7 million and $3.0 million, respectively, to their other post-
retirement benefit plans during the second quarter of 2005.
12. Subsequent Events
On July 7, 2005, KU completed a new tax-exempt financing totaling $13.3
million. The new bonds, due June 1, 2035, carry a variable, auction
rate of interest. The proceeds will be used to finance a portion of the
costs of new pollution control equipment at KU's Ghent Station.
On July 8, 2005, KU entered into a $50 million long-term unsecured loan
from Fidelia. The new loan matures in July 2015 and has an interest
rate of 4.735%. This loan replaces the $50 million, 7.55% First
Mortgage Bonds, Series R that were called in June 2005.
On July, 15, 2005, LG&E redeemed 12,500 shares of its 5.875%
mandatorily redeemable preferred stock pursuant to sinking fund
requirements at $100 per share.
The Energy Policy Act of 2005 was enacted on August 8, 2005. Among
other matters, this comprehensive legislation contains provisions
mandating improved electric reliability standards and performance;
providing economic and other incentives relating to transmission,
pollution control and renewable generation assets; increasing funding
for clean coal generation incentives; and repealing the Public Utility
Holding Company Act of 1935. The Companies are currently examining the
potential impacts of the Energy Policy Act of 2005.
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 six month period ended June
30, 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 394,000 customers and natural gas to approximately 321,000
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.
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 installation of four combustion turbines at Trimble County in
2004, 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. Three applications for transmission
CCN's were filed with the Kentucky Commission in May 2005 for the
construction of three transmission facilities to support Trimble County
Unit 2. Hearings on the air permit application are scheduled to commence
in August 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, which was
approved in 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.
Three Months Ended June 30, 2005, Compared to
Three Months Ended June 30, 2004
LG&E Results:
LG&E's net income increased $10.9 million (64%) for the three months ended
June 30, 2005, as compared to the three months ended June 30, 2004,
primarily due to the increase in electric and gas base rates effective July
1, 2004, higher electric wholesale revenues, and lower operation expenses.
A comparison of LG&E's revenues for the three months ended June 30, 2005,
with the three months ended June 30, 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 $ 5.7 $ 3.5
Environmental cost recovery surcharge 4.4 -
Earnings sharing mechanism (3.5) -
Weather normalization - 0.7
Rates and rate structure 10.0 2.1
Variation in sales volume and other (2.1) (0.8)
Total retail sales 14.5 5.5
Wholesale sales 22.0 3.3
Other (0.8) -
Total $35.7 $ 8.8
Electric revenues increased $35.7 million (19%) in 2005 primarily due to:
- Higher wholesale revenues ($22.0 million), primarily due to 6% higher
prices and 67% higher sales volume.
- An increase in rates and a change in rate structure ($10.0 million),
related to the rate case order which took effect on July 1, 2004.
- Higher fuel supply adjustments ($5.7 million) due to significantly
higher fuel costs.
- Higher environmental cost recovery surcharge ($4.4 million).
- Lower earnings sharing mechanism, resulting from termination of the
mechanism in March 2005 ($3.5 million).
During the second quarter of 2005, LG&E made out-of-period adjustments for
estimated under collection of ECR revenues to be billed in subsequent
periods. The adjustment was immaterial during all reporting periods
involved (March 2003 through October 2004). As a result, LG&E revenues were
increased $4.8 million in the current period results of operations. Net
income in the current period was increased $2.9 million for LG&E.
Gas revenues increased $8.8 million (20%) in 2005 primarily due to:
- - Higher gas supply adjustment ($3.5 million) due to higher gas costs.
- - Higher wholesale revenues ($3.3 million) due to higher sales volumes
(476,000 MCF in 2005 versus 49,000 MCF in 2004) and 32% higher prices.
- - An increase in rates and a change in rate structure ($2.1 million),
related to the rate case order which took effect on July 1, 2004.
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 $20.4 million (43%) in 2005
primarily due to:
- Increased cost per Btu (24% higher), resulting in $13.3 million higher
fuel costs.
- Increased generation (15% higher), resulting in $7.1 million higher
fuel costs.
Power purchased increased $10.9 million (63%) in 2005 primarily due to:
- Increased cost per Mwh (38% higher), resulting in $7.8 million higher
costs.
- Increased Mwh purchases (18% higher), resulting in $3.1 million higher
costs.
Gas supply expenses increased $4.6 million (15%) in 2005 primarily due
to:
- Increased cost of purchases for wholesale sales ($2.7 million).
- Increased volume of gas delivered to the distribution system ($2.5
million).
- Decreased recovery of performance-based rates ($0.3 million).
- Decreased gas price (net of gas supply clause adjustments)($0.3
million).
Other operations and maintenance expenses decreased $12.3 million (16%) in
2005.
Other operation expenses decreased $15.7 million (28%) in 2005 primarily
due to:
- Decreased other power supply expense ($7.6 million). This is primarily
related to credits received from MISO for Day 2 revenue sufficiency
guarantee payments (RSGs) totaling $12.6 million (received by LG&E when
units are required to run at a higher generating cost than the market will
pay). Excluding the RSGs, other power supply expense increased $5.0
million due to MISO Day 2 costs related to meeting native load
requirements.
- Decreased distribution operations expense ($6.9 million); storm expense
of approximately $7.4 million was recorded in the second quarter of 2004.
- Decreased transmission expense, primarily MISO-related ($2.5 million).
- Decreased information technology systems operations expense ($1.3
million) (charged to maintenance expenses in 2005).
- Increased steam generation operations expense ($1.9 million), primarily
related to scrubber reactant expense.
- Increased customer records and collections expense ($0.6 million).
Maintenance expenses increased $3.2 million (21%) in 2005 primarily due
to:
- Increased information technology systems maintenance ($1.3 million)
(charged to operation expenses in 2004).
- Increased steam generation maintenance, primarily due to outage repairs
at Cane Run ($1.1 million).
- Increased gas distribution system maintenance ($0.3 million) and
underground storage maintenance ($0.1 million).
- Increased combustion turbine maintenance ($0.2 million).
Property and other taxes increased $0.2 million (5%) in 2005.
Depreciation and amortization expense increased $3.0 million (11%) in 2005
primarily due to additional plant in service.
In total, interest expense increased $0.5 million (6%) in 2005 primarily
due to:
- - Increased interest on variable-rate debt ($2.0 million).
- - Decreased interest costs on interest rate swaps ($0.9 million).
- - Decreased interest due to interest paid on tax payments in April 2004
($0.3 million).
- - Decreased interest on Fidelia debt ($0.3 million).
The weighted average interest rate on variable-rate bonds for the three
months ended June 30, 2005, was 2.61%, compared to 1.08% 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
June 30, 2005 June 30, 2004
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.3 5.8
Amortization of investment and other tax credits (2.3) (6.6)
Other differences (2.0) 0.6
Effective income tax rate 36.0% 34.8%
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 higher tax rates than the
current statutory rate.
See Part 1 - Item 1, Notes to Financial Statements, Note 6 for additional
discussion of income taxes.
KU Results:
KU's net income decreased $9.9 million (36%) for the three months ended
June 30, 2005, as compared to the three months ended June 30, 2004. The
decrease was primarily due to increased operation and maintenance expenses
and higher depreciation expenses.
A comparison of KU's revenues for the three months ended June 30, 2005,
with the three months ended June 30, 2004, reflects increases and
(decreases) which have been segregated by the following principal causes:
Cause Electric
(in millions) Revenues
Retail sales:
Fuel supply adjustments $22.6
Environmental cost recovery surcharge 2.1
Earnings sharing mechanism (3.9)
Rates and rate structure 14.6
Variation in sales volume and other (0.1)
Total retail sales 35.3
Wholesale sales 5.2
Provision for rate collections (5.4)
Other (2.3)
Total $32.8
Electric revenues increased $32.8 million (14%) in 2005 primarily due to:
- - Higher fuel supply adjustments ($22.6 million) due to higher cost of
fuel used for generation and purchased power.
- - An increase in rates and a change in rate structure ($14.6 million),
related to the rate case order which took effect on July 1, 2004.
- - Higher wholesale revenues ($5.2 million), primarily due to 19% higher
prices.
- - Higher environmental cost recovery surcharge ($2.1 million).
- - Lower provision for rate collections ($5.4 million).
- - Lower earnings sharing mechanism revenues, resulting from termination
of the mechanism in March 2005 ($3.9 million).
During the second quarter of 2005, KU made out-of-period adjustments for
estimated over collection of ECR revenues to be billed in subsequent
periods. The adjustment was immaterial during all reporting periods
involved (May 2003 through January 2005). As a result, KU revenues were
decreased $2.4 million in the current period results of operations. Net
income in the current period was reduced $1.5 million for KU.
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 $16.3 million (24%) in 2005
primarily due to:
- Increased cost per Btu (37% higher), resulting in $22.5 million higher
fuel costs.
- Decreased generation (9% lower), resulting in $6.2 million lower fuel
costs, primarily due to a major turbine overhaul at E.W. Brown Unit 3 and
outage at Green River Unit 4.
Power purchased increased $19.3 million (63%) in 2005 primarily due to:
- Increased cost per Mwh (30% higher), resulting in $11.4 million higher
costs.
- Increased volumes of Mwh purchased (26% higher), resulting in $7.9
million higher costs.
Other operations and maintenance expenses increased $10.0 million (17%) in
2005.
Other operation expenses increased $3.8 million (11%) in 2005 primarily
due to:
- Increased other power supply expense ($3.5 million). KU received from
MISO RSGs totaling $3.1 million (received when KU units are required to
run at a higher generating cost than the market will pay). Excluding the
RSGs, other power supply expense increased $6.6 million due to MISO Day 2
costs related to meeting native load requirements.
- Increased pension expense ($1.2 million).
- Increased customer accounts and collection expense ($1.0 million).
- Decreased transmission expense, primarily MISO-related ($1.1 million).
- Decreased information technology systems operation expenses ($1.1
million) (charged to maintenance expenses in 2005).
Maintenance expenses increased $6.0 million (35%) in 2005 primarily due
to:
- Increased steam generation maintenance expense ($4.6 million),
primarily due to major turbine overhauls at E.W. Brown and Ghent.
- Increased information technology systems maintenance ($1.1 million)
(charged to operation expenses in 2004).
- Increased transmission system maintenance ($0.3 million).
Property and other taxes increased $0.2 million (4%).
Depreciation and amortization increased $3.3 million (13%) primarily due to
additional plant in service.
In total, interest expense increased $0.7 million (10%) in 2005 primarily
due to:
- - Increased interest costs associated with variable rate debt ($0.8
million).
- - Increased interest costs associated with the interest rate swaps ($0.7
million).
- - Decreased interest costs due to refinancing fixed rate debt with
variable rate debt ($0.4 million).
- - Decreased interest costs for mark-to-market of the interest rate swaps
($0.3 million).
The weighted average interest rate on variable-rate bonds for the three
months ended June 30, 2005, was 2.72%, compared to 1.11% 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
June 30, 2005 June 30, 2004
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.2 6.0
Amortization of investment and other tax
credits (1.5) (1.2)
Other differences (2.7) (1.8)
Effective income tax rate 36.0% 38.0%
The increased tax benefit in other differences for 2005 is largely
attributable to excess deferred income taxes (1.9%), which reflect the
benefits of deferred tax reversing at higher tax rates than the current
statutory rate.
See Part 1 - Item 1, Notes to Financial Statements, Note 6 for additional
discussion of income taxes.
Six Months Ended June 30, 2005, Compared to
Six Months Ended June 30, 2004
LG&E Results:
LG&E's net income increased $20.5 million (50%) for the six months ended
June 30, 2005, as compared to the six months ended June 30, 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 six months ended June 30, 2005,
with the six months ended June 30, 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 $ 9.3 $ 4.8
Environmental cost recovery surcharge 3.6 -
Earnings sharing mechanism (7.1) -
LG&E/KU merger surcredit (1.7) -
Value delivery surcredit (0.5) (0.3)
Rates and rate structure 25.3 12.4
Variation in sales volume and other 0.7 (8.6)
Total retail sales 29.6 8.3
Wholesale sales 36.3 9.2
Provision for rate collections 2.3 -
Other (1.8) 0.2
Total $66.4 $17.7
Electric revenues increased $66.4 million (17%) in 2005 primarily due to:
- - Higher wholesale revenues ($36.3 million), primarily due to 16% higher
prices and 20% higher sales volumes.
- - An increase in rates and a change in rate structure ($25.3 million),
related to the rate case order which took effect on July 1, 2004.
- - Higher fuel supply adjustments ($9.3 million) due to higher cost of
fuel used for generation and purchased power.
- - Higher environmental cost recovery surcharge ($3.6 million).
- - Lower earnings sharing mechanism revenues, resulting from termination
of the mechanism in March 2005 ($7.1 million).
During the second quarter of 2005, LG&E made out-of-period adjustments for
estimated under collection of ECR revenues to be billed in subsequent
periods. The adjustment was immaterial during all reporting periods
involved (March 2003 through October 2004). As a result, LG&E revenues were
increased $4.8 million in the current period results of operations. Net
income in the current period was increased $2.9 million for LG&E.
Gas revenues increased $17.7 million (9%) in 2005 primarily due to:
- - An increase in rates and a change in rate structure ($12.4 million),
related to the rate case order which took effect on July 1, 2004.
- - Higher wholesale revenues ($9.2 million) due to 106% higher sales
volumes and 15% higher prices.
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 $27.9 million (28%) in 2005
primarily due to:
- Increased cost per Btu (20% higher), resulting in $21.5 million higher
fuel costs.
- Increased generation (6% higher), resulting in $6.4 million higher fuel
costs.
Power purchased increased $21.0 million (45%) in 2005 primarily due to:
- Increased cost per Mwh (37%), resulting in $18.2 million higher costs.
- Increased volume of power purchased (6%), resulting in $2.8 million
higher costs.
Gas supply expenses increased $9.4 million (6%) in 2005 primarily due to:
- Increased cost of purchases for wholesale sales ($8.3 million).
- Increased volume of gas delivered to the distribution system ($1.1
million).
Other operations and maintenance expenses decreased $12.4 million (8%) in
2005.
Other operation expenses decreased $19.8 million (17%) in 2005 primarily
due to:
- Decreased distribution operations expense ($7.5 million); storm expense
of approximately $7.4 million was recorded in the second quarter of 2004.
- Decreased other power supply expense ($7.4 million). This is primarily
related to credits received from RSGs totaling $12.6 million. Excluding
the RSGs, other power supply expense increased $5.2 million due to MISO
Day 2 costs related to meeting native load requirements.
- Decreased transmission expense, primarily MISO-related ($5.6 million).
- Decreased information technology systems operations expense ($2.6
million) (charged to maintenance expenses in 2005).
- Decreased property insurance expense ($0.4 million).
- Increased steam generation operations expense ($2.4 million).
- Increased customer records and collection expenses ($1.0 million).
Maintenance expenses increased $6.7 million (25%) in 2005 primarily due
to:
- Increased information technology systems maintenance ($2.6 million)
(charged to operation expenses in 2004).
- Increased steam generation maintenance, primarily due to outage repairs
at Cane Run ($2.2 million).
- Increased distribution system maintenance (including tree trimming and
underground conductor repairs) ($0.7 million).
- Increased gas distribution system expense ($0.8 million).
- Increased electric transmission system maintenance ($0.4 million).
Property and other taxes increased $0.7 million (8%) in 2005.
Depreciation and amortization increased $6.3 million (11%) primarily due to
additional plant in service.
Other income - net increased $0.9 million in 2005 primarily due to:
- - Increased mark-to-market income (net) ($0.3 million) related to energy
trading contracts.
- - Decreased miscellaneous deductions ($0.7 million).
In total, interest expense increased $1.5 million (9%) in 2005 primarily
due to:
- - Increased interest on variable-rate debt ($3.1 million).
- - Increased interest on customer deposits ($0.6 million).
- - Increased interest on money pool borrowings ($0.4 million).
- - Decreased interest costs on interest rate swaps ($1.5 million).
- - Decreased interest on affiliated loans with Fidelia ($0.6 million).
- - Decreased interest due to interest paid on tax payments in April 2004
($0.3 million).
The weighted average interest rate on variable-rate bonds for the six
months ended June 30, 2005, was 2.27%, compared to 1.06% 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.
Six Months Six Months
Ended Ended
June 30, 2005 June 30, 2004
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 4.7 5.7
Amortization of investment and other tax credits (2.1) (4.3)
Other differences (1.7) 0.2
Effective income tax rate 35.9% 36.6%
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 higher tax rates than the
current statutory rate.
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 decreased $4.7 million (8%) for the six months ended June
30, 2005, as compared to the six months ended June 30, 2004. The decrease
was primarily due to higher operations and maintenance expenses and higher
depreciation expense, partially offset by the increase in base rates
effective July 1, 2004 and higher wholesale sales.
A comparison of KU's revenues for the six months ended June 30, 2005, with
the six months ended June 30, 2004, reflects increases and (decreases)
which have been segregated by the following principal causes:
Cause Electric
(in millions) Revenues
Retail sales:
Fuel supply adjustments $35.7
Environmental cost recovery surcharge 6.8
Earnings sharing mechanism (8.3)
LG&E/KU merger surcredit (1.6)
Rates and rate structure 26.9
Variation in sales volume and other 0.4
Total retail sales 59.9
Wholesale sales 20.8
Provision for rate collections (4.6)
Other (4.3)
Total $71.8
Electric revenues increased $71.8 million (15%) in 2005 primarily due to:
- - Higher fuel supply adjustments ($35.7 million) due to higher cost of
fuel used for generation and purchased power.
- - An increase in rates and a change in rate structure ($26.9 million),
related to the rate case order which took effect on July 1, 2004.
- - Higher wholesale revenues ($20.8 million), primarily due to 25% higher
prices.
- - Higher environmental cost recovery surcharge ($6.8 million).
- - Lower earnings sharing mechanism, resulting from termination of the
mechanism in March 2005($8.3 million).
- - Lower provision for rate collections ($4.6 million).
During the second quarter of 2005, KU made out-of-period adjustments for
estimated over collection of ECR revenues to be billed in subsequent
periods. The adjustment was immaterial during all reporting periods
involved (May 2003 through January 2005). As a result, KU revenues were
decreased $2.4 million in the current period results of operations. Net
income in the current period was reduced $1.5 million for KU.
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 $33.8 million (25%) in 2005
primarily due to:
- Increased cost per Btu (10% higher), resulting in $38.9 million higher
fuel costs.
- Decreased generation (4% lower), resulting in $5.1 million lower fuel
costs.
Power purchased increased $24.3 million (34%) in 2005 primarily due to:
- Increased cost per Mwh (20% higher), resulting in $16.2 million higher
costs.
- Increased volumes of Mwh purchased (11% higher), resulting in $8.1
million higher costs.
Other operations and maintenance expenses increased $14.0 million (12%) in
2005.
Other operation expenses increased $2.4 million (3%) in 2005 primarily
due to:
- Increased other power supply expenses ($3.6 million). KU received from
MISO RSGs totaling $3.1 million. Excluding the RSGs, other supply expense
increased $6.7 million due to MISO Day 2 costs related to meeting native
load requirements.
- Increased customer records and collections expenses ($1.6 million).
- Decreased information technology systems operation expenses ($2.2
million) (charged to maintenance expenses in 2005).
Maintenance expenses increased $11.2 million (39%) in 2005 primarily due
to:
- Increased steam generation maintenance ($7.0 million) due to outages at
Ghent, E.W. Brown, and Green River plants.
- Increased distribution system maintenance ($1.6 million) due to storm
restoration expenses.
- Increased information technology systems maintenance ($2.2 million)
(charged to operation expenses in 2004).
- Increased transmission system maintenance ($0.4 million).
Property and other taxes increased $0.4 million.
Depreciation and amortization increased $6.5 million (13%) primarily due to
additional plant in service.
In total, interest expense increased $2.7 million (23%) in 2005 primarily
due to:
- Increased interest costs associated with the mark-to-market of the
interest rate swaps ($1.6 million).
- Increased interest on variable rate debt ($1.2 million).
- Increased interest costs on interest rate swaps ($0.8 million).
- Decreased interest costs due to refinancing fixed rate debt with
variable rate debt ($0.9 million).
The weighted average interest rate on variable-rate bonds for the six
months ended June 30, 2005, was 2.31%, compared to 1.08% for the comparable
period in 2004.
Variations in income tax expense are largely attributable to changes in
pretax income.
Six Months Six Months
Ended Ended
June 30, 2005 June 30, 2004
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 4.8 5.9
Amortization of investment and other tax
credits (1.0) (1.1)
Other differences (1.8) (1.7)
Effective income tax rate 37.0% 38.1%
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 in addition to debt service requirements and
dividend payments. 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 June 30, 2005, LG&E and KU were 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 six months ended June 30, 2005 amounted
to $51.0 million for LG&E and $44.0 million for KU. At LG&E, expenditures
include connection of new customers ($14.3 million), gas main replacements
($5.9 million), enhancements to distribution system to meet demand ($3.0
million), replacement of defective distribution equipment ($3.1 million),
and a new transmission line ($1.7 million). At KU, expenditures included
connection of new customers ($18.0 million), expenditures to improve boiler
and other generation equipment reliability ($5.9 million), and replacement
of defective distribution equipment ($2.3 million). The expenditures were
financed with internally generated funds.
LG&E's and KU's cash balances decreased $2.0 million and $0.6 million,
respectively, during the six months ended June 30, 2005, primarily due to
the payment of dividends and repayments of debt and construction
expenditures, partially 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 was primarily due to the seasonal
impact of decreased gas sales. 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 June 30, 2005, LG&E had swaps with a combined notional
value of $211.3 million and KU had one swap with a notional value of $53.0
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 swap effectively converts fixed-rate
obligations on KU's first mortgage bonds Series P to variable-rate
obligations.
In June 2005, an interest rate swap with a notional amount of $50 million
was terminated by the counterparty pursuant to the terms of the swap
agreement. KU received a payment of $1.9 million in consideration for the
termination of the agreement. KU also called the underlying debt (First
Mortgage Bond Series R) and paid a call premium of $1.9 million.
The swap was fully effective upon termination, therefore, no impact on
earnings occurred as a result of the bond call and related swap
termination.
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 June 30, 2005, LG&E's and KU's percentage of debt having a variable
rate, including the impact of interest rate swaps, was 45.5% ($383.7
million) and 51.5% ($392.2 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 six months ending June
30, 2005 was 2.23% for the LG&E bonds and 2.30% for the KU bonds.
During June 2005, LG&E renewed five revolving lines of credit with banks
totaling $185 million. There was no outstanding balance under any of these
facilities at June 30, 2005. The Company expects to renew these facilities
prior to their expiration in June 2006.
LG&E, KU and LG&E Energy participate in an intercompany money pool
agreement. Details of the balances at June 30, 2005 and June 30, 2004 were
as follows:
Total Money Amount Balance Average
($ in millions) Pool Available Outstanding Available Interest Rate
June 30, 2005:
LG&E $400.0 $20.8 $379.2 3.06%
KU $400.0 $93.1 $306.9 3.06%
June 30, 2004:
LG&E $400.0 $26.0 $374.0 1.04%
KU $400.0 $53.2 $346.8 1.04%
LG&E Energy maintains a revolving credit facility totaling $200 million
with an affiliated company, E.ON North America, Inc., to ensure funding
availability for the money pool. The balance outstanding on this facility
at June 30, 2005 was $159.7 million.
Redemptions and maturities of long-term debt year-to-date through June 30,
2005, are summarized below:
($ in millions)
Principal Secured/
Year Company Description Amount Rate Unsecured Maturity
2005 LG&E Pollution control bonds $40.0 5.90% Secured Apr 2023
2005 LG&E Due to Fidelia $50.0 1.53% Secured Jan 2005
2005 KU First mortgage bonds $50.0 7.55% Secured Jun 2025
Issuances of long-term debt year-to-date through June 30, 2005, are
summarized below:
($ in millions)
Principal Secured/
Year Company Description Amount Rate Unsecured Maturity
2005 LG&E Pollution control bonds $40.0 Variable Secured Feb 2035
The proceeds of the 2005 loan at LG&E were used to refinance existing
pollution control bonds.
In May 2005, KU repaid a $26.7 million loan against the cash surrender
value of life insurance policies.
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 currently anticipated
for either LG&E or KU for 2005. LG&E and KU contributed $0.7 million and
$3.0 million, respectively, to their other post-retirement benefit plans
during the second quarter of 2005.
Security ratings as of June 30, 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.
Capitalization ratios at June 30, 2005, and December 31, 2004, follow:
LG&E KU
June 30, December 31, June 30, December 31,
2005 2004 2005 2004
Long-term debt
(including current portion) 31.7% 30.5% 19.0% 22.2%
Long-term debt to affiliated
company(including current
portion) 12.0 14.1 18.6 18.8
Notes payable to affiliated
companies 1.1 3.0 5.2 2.0
Preferred stock 3.7 3.6 2.2 2.2
Common equity 51.5 48.8 55.0 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 Statements, 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.
Interest Rate Risk
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.
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 $3.8 million and $3.9 million, respectively, at June 30, 2005. LG&E's
and KU's exposure to floating interest rates did not materially change
during the first six 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 $20.5 million as of June 30, 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 $0.8 million as
of June 30, 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 currently anticipated
for either LG&E or KU for 2005. LG&E and KU contributed $0.7 million and
$3.0 million, respectively, to their other post-retirement benefit plans
during the second quarter of 2005.
Energy Risk Management Activities
The table below summarizes LG&E's and KU's energy risk management
activities for the three months and six months ended June 30, 2005, and
2004. Volumes are allocated evenly between LG&E and KU.
Three Months Six Months
Ended Ended
June 30, June 30,
2005 2004 2005 2004
(in millions)
Fair value of contracts at beginning of
period, net asset/(liability) $ - $ 0.6 $(0.2) $ 0.6
Fair value of contracts when entered
into during the period - - - -
Contracts realized or otherwise
settled during the period - (0.1) 0.2 (0.3)
Changes in fair value due to
changes in assumptions - - - 0.2
Fair value of contracts at end of
period, net asset $ - $ 0.5 $ - $ 0.5
No changes to valuation techniques for energy 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 June 30, 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
June 30, 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. On April 1, 2005, the MISO
Day 2, a day-ahead and real-time energy market, became effective which
impacted our regulated electric generation operations and purchased power.
In connection with the implementation of MISO Day 2, LG&E and KU have
implemented a new software system and modified existing processes to
facilitate participation in, and validate resultant settlements from the
MISO market. Apart from this change, there have been no other changes in
the Companies' internal control over financial reporting that occurred
during the fiscal quarter ended June 30, 2005, that has materially
affected, or is reasonably likely to materially affect, the Companies'
internal control over financial reporting.
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 LG&E's and KU's Quarterly
Report on Form 10-Q for the three months ended March 31, 2005 and this 10-
Q, respectively. 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 4. Submission of Matters to a Vote of Security Holders.
a)LG&E's and KU's Annual Meetings of Shareholders were held on June 17,
2005.
b)Not applicable.
c)The matters voted upon and the results of the voting at the Annual
Meetings are set forth below:
1. LG&E
i)The shareholders voted to elect LG&E's nominees for election to the
Board of Directors, as follows:
Victor A. Staffieri - 21,294,223 common shares and 94,209
preferred shares cast in favor of election and 5,713 preferred
shares withheld.
S. Bradford Rives - 21,294,223 common shares and 94,209 preferred
shares cast in favor of election and 5,713 preferred shares
withheld.
John R. McCall - 21,294,223 common shares and 93,950 preferred
shares cast in favor of election and 5,972 preferred shares
withheld.
Paul W. Thompson - 21,294,223 common shares and 94,261 preferred
shares cast in favor of election and 5,661 preferred shares
withheld.
Chris Hermann - 21,294,223 common shares and 94,237 preferred
shares cast in favor of election and 5,685 preferred shares
withheld.
No holders of common or preferred shares abstained from voting on
this matter.
ii)The shareholders voted 21,294,223 common shares and 98,044
preferred shares in favor of and 310 preferred shares against the
approval of PricewaterhouseCoopers LLP as independent accountants
for 2005. Holders of 1,989 preferred shares abstained from voting
on this matter.
2. KU
i)The sole shareholder voted to elect KU's nominees for election to
the Board of Directors, as follows:
37,817,878 common shares cast in favor of election and no shares
withheld for each of Victor A. Staffieri, S. Bradford Rives,
John R. McCall, Paul W. Thompson, and Chris Hermann, respectively.
ii)The sole shareholder voted 37,817,878 common shares in favor of and
no shares withheld for approval of PricewaterhouseCoopers LLP as
independent accountants for 2005.
No holders of common shares abstained from voting on these matters.
d) Not applicable.
Item 6. Exhibits.
Applicable to Form
10-Q of
Exhibit
No. LG&E KU Description
4.1 X Supplemental Indenture dated as of April 1, 2005
from Louisville Gas and Electric Company to BNY Midwest
Trust Company, Chicago, Illinois, as trustee [Filed as
Exhibit 4.1 to LG&E's Form 8-K Current Report dated April
13, 2005]
4.2 X Loan Agreement dated February 1, 2005 between
Louisville Gas and Electric Company and the
Louisville/Jefferson County Metro Government, Kentucky
[Filed as Exhibit 10.1 to LG&E's Form 8-K Current Report
dated April 13, 2005]
4.3 XSupplemental Indenture dated as of June 15, 2005 from
Kentucky Utilities Company to U.S. Bank National
Association, Chicago, Illinois, as trustee [Filed as Exhibit
4.1 to KU's Form 8-K Current Report dated July 7, 2005]
4.4 XLoan Agreement dated May 1, 2005 between Kentucky Utilities
Company and the County of Carroll, Kentucky [Filed as
Exhibit 4.2 to KU's Form 8-K Current Report dated July 7,
2005]
4.5 XLoan Agreement dated July 8, 2005 between Kentucky
Utilities Company and Fidelia Corporation [Filed as Exhibit
4.3 to KU's Form 8-K Current Report dated July 7, 2005]
4.6 XCopy of Promissory Note from KU to Fidelia Corporation,
dated as of July 8, 2005 [Filed as Exhibit 4.4 to KU's Form
8-K Current Report dated July 7, 2005]
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.
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: August 12, 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: August 12, 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)
Exhibit 31.1
CERTIFICATIONS
Louisville Gas and Electric Company
I, Victor A. Staffieri, Chairman of the Board, President and Chief
Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Louisville Gas and
Electric Company;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 12, 2005
/s/ Victor A. Staffieri
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
Exhibit 31.2
Louisville Gas and Electric Company
I, S. Bradford Rives, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Louisville Gas and
Electric Company;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 12, 2005
/s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
Exhibit 31.3
Kentucky Utilities Company
I, Victor A. Staffieri, Chairman of the Board, President and Chief
Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kentucky Utilities
Company;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 12, 2005
/s/ Victor A. Staffieri
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
Exhibit 31.4
Kentucky Utilities Company
I, S. Bradford Rives, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kentucky Utilities
Company;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 12, 2005
/s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Louisville Gas and Electric
Company and Kentucky Utilities Company (the "Companies") on Form 10-Q for
the period ended June 30, 2005, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), each of the undersigned does
hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's
knowledge,
1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Companies as of the dates and for the periods expressed in the Report.
August 12, 2005
/s/ Victor A. Staffieri
Chairman of the Board, President
and Chief Executive Officer
Louisville Gas and Electric Company
Kentucky Utilities Company
/s/ S. Bradford Rives
Chief Financial Officer
Louisville Gas and Electric Company
Kentucky Utilities Company
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
_______________________________
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