SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
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/ / Preliminary Proxy Statement
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14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
LOUISVILLE GAS AND ELECTRIC COMPANY
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(Name of Registrant as Specified In Its Charter)
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[LOGO]
April 28, 2000
Dear Louisville Gas and Electric Company Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Louisville Gas and Electric Company to be held on Wednesday, June 7, 2000 at
10:00 a.m., E.D.T. at the Kentucky International Convention Center (formerly the
Commonwealth Convention Center), Fourth and Market Streets, Louisville,
Kentucky.
Business items to be acted upon at the Annual Meeting are the election of
four directors, the approval of Arthur Andersen LLP as independent auditors of
the Company for 2000 and the transaction of any other business properly brought
before the meeting. Additionally, we will report on the progress of LG&E and
shareholders will have the opportunity to present questions of general interest.
We encourage you to read the proxy statement carefully and complete, sign
and return your proxy in the envelope provided, even if you plan to attend the
meeting. Returning your proxy to us will not prevent you from voting in person
at the meeting, or from revoking your proxy and changing your vote at the
meeting, if you are present and choose to do so.
If you plan to attend the Annual Meeting, please check the box on the proxy
card indicating that you plan to attend the meeting. Please bring the Admission
Ticket, which forms the top portion of the form of proxy, to the meeting with
you. If you wish to attend the meeting but do not have an Admission Ticket, you
will be admitted to the meeting after presenting personal identification and
evidence of ownership.
The directors and officers of LG&E appreciate your continuing interest in
the business of LG&E. We hope you can join us at the meeting.
Sincerely,
[SIGNATURE]
Roger W. Hale
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
[LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of Louisville Gas and Electric Company
("LG&E"), a Kentucky corporation, will be held at the Kentucky International
Convention Center (formerly the Commonwealth Convention Center), Fourth and
Market Streets, Louisville, Kentucky, on Wednesday June 7, 2000 at 10:00 a.m.,
E.D.T. At the Annual Meeting, shareholders will be asked to consider and vote
upon the following matters, which are more fully described in the accompanying
proxy statement:
1. A proposal to elect four directors for three-year terms expiring in
2003;
2. A proposal to approve and ratify the appointment of Arthur Andersen LLP
as independent auditors of LG&E for 2000; and
3. Such other business as may properly come before the meeting.
The close of business on April 7, 2000, has been fixed by the Board of
Directors as the record date for determination of shareholders entitled to
notice of and to vote at the Annual Meeting or any adjournment thereof.
You are cordially invited to attend the annual meeting. WHETHER OR NOT YOU
PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR
PROXY IN THE REPLY ENVELOPE AS SOON AS POSSIBLE. Your cooperation in signing and
promptly returning your proxy is greatly appreciated.
By Order of the Board of Directors,
John R. McCall, Secretary
Louisville Gas and Electric Company
220 West Main Street
Louisville, Kentucky 40202
April 28, 2000
PROXY STATEMENT
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ANNUAL MEETING OF SHAREHOLDERS TO BE HELD JUNE 7, 2000
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The Board of Directors of Louisville Gas and Electric Company ("LG&E" or the
"Company") hereby solicits your proxy, and asks that you vote, sign, date and
promptly mail the enclosed proxy card for use at the Annual Meeting of
Shareholders to be held June 7, 2000, and at any adjournment of such meeting.
The meeting will be held at the Kentucky International Convention Center
(formerly the Commonwealth Convention Center), Fourth and Market Streets,
Louisville, Kentucky. This proxy statement and the accompanying proxy were first
mailed to shareholders on or about April 28, 2000.
If you plan to attend the meeting, please check the box on the proxy card
indicating that you plan to attend the meeting. Also, please bring the Admission
Ticket, which forms the top portion of the form of proxy, to the meeting with
you. Shareholders who do not have an Admission Ticket, including beneficial
owners whose accounts are held by brokers or other institutions, will be
admitted to the meeting upon presentation of personal identification and, in the
case of beneficial owners, proof of ownership.
The outstanding stock of LG&E is divided into three classes: Common Stock,
Preferred Stock (without par value), and Preferred Stock, par value $25 per
share. At the close of business on April 7, 2000, the record date for the Annual
Meeting, the following shares of each were outstanding:
Common Stock, without par value............................. 21,294,223 shares
Preferred Stock, par value $25 per share, 5% Series......... 860,287 shares
Preferred Stock, without par value, $5.875 Series........... 250,000 shares
Auction Series A (stated value $100 per share).............. 500,000 shares
All of the outstanding LG&E Common Stock is owned by LG&E Energy Corp.
("LG&E Energy"). Based on information contained in a Schedule 13G originally
filed with the Securities and Exchange Commission in October 1998, AMVESCAP PLC,
a parent holding company, reported certain holdings in excess of five percent of
LG&E's Preferred Stock. AMVESCAP PLC, with offices at 1315 Peachtree Street,
N.W., Atlanta, Georgia 30309, and certain of its subsidiaries reported sole
voting and dispositive power as to no shares and shared voting and dispositive
power as to 43,000 shares of LG&E Preferred Stock, without par value, $5.875
Series, representing 17.2% of that class of Preferred Stock. The reporting
companies indicated that they hold the shares on behalf of other persons who
have the right to receive or the power to direct the receipt of dividends or the
proceeds of sales of the shares. No other persons or groups are known by
management to be beneficial owners of more than five percent of LG&E's Preferred
Stock. As of April 7, 2000, all directors, nominees for director and executive
officers of LG&E as a group beneficially owned no shares of LG&E Preferred
Stock.
Owners of record of LG&E Energy Common Stock at the close of business on
April 7, 2000, of the Common Stock and the 5% Cumulative Preferred Stock, par
value $25 per share (the "5% Preferred Stock") are entitled to one vote per
share for each matter presented at the Annual Meeting or any adjournment
thereof. In addition, each shareholder has cumulative voting rights with respect
to the election of directors. Accordingly, in electing directors, each
shareholder is entitled to as many votes as the number of shares of stock owned
multiplied by the number of directors to be elected. All such votes may be cast
for a single nominee or may be distributed among two or more nominees. The
persons named as proxies reserve the right to cumulate votes represented by
proxies that they receive and to distribute such votes among one or more of the
nominees at their discretion.
1
You may revoke your proxy at any time before it is voted by giving written
notice of its revocation to the Secretary of LG&E, by delivery of a later dated
proxy, or by attending the Annual Meeting and voting in person. Signing a proxy
does not preclude you from attending the meeting in person.
Directors are elected by a plurality of the votes cast by the holders of
LG&E's Common Stock and 5% Preferred Stock at a meeting at which a quorum is
present. "Plurality" means that the individuals who receive the largest number
of votes cast are elected as directors up to the maximum number of directors to
be chosen at the meeting. Consequently, any shares not voted (whether by
withholding authority, broker non-vote or otherwise) have no impact on the
election of directors except to the extent the failure to vote for an individual
results in another individual receiving a larger percentage of votes.
The affirmative vote of a majority of the shares of LG&E Common Stock and 5%
Preferred Stock represented at the Annual Meeting is required for the approval
of the independent auditors and any other matters that may properly come before
the meeting. Abstentions from voting on any such matter are treated as votes
against, while broker non-votes are treated as shares not voted.
LG&E Energy owns all of the outstanding LG&E Common Stock, and intends to
vote this stock in favor of the nominees for directors as set forth below,
thereby ensuring their election to the Board. LG&E Energy also intends to vote
all of the outstanding LG&E Common Stock in favor of the appointment of Arthur
Andersen LLP as the independent auditors for LG&E as set forth in Proposal No.
2. Nonetheless, the Board encourages you to vote on each of these matters, and
appreciates your interest.
The 1999 Summary Annual Report and the 1999 Financial Report of LG&E Energy
(collectively, the "Annual Report"), including its consolidated financial
statements and information regarding LG&E, is enclosed with this proxy
statement. These materials are supplemented by the Louisville Gas and Electric
Company 1999 Financial Report, containing audited financial statements of LG&E
and management's discussion of such financial statements, which are included as
an appendix to this proxy statement (the "Appendix"), and are incorporated by
reference herein. All shareholders are urged to read the accompanying Annual
Report and Appendix.
On February 28, 2000, LG&E Energy announced that its Board of Directors
accepted an offer to be acquired by PowerGen plc ("PowerGen"), a public limited
company with registered offices in England and Wales, for cash of approximately
$3.2 billion, or $24.85 per share of LG&E Energy common stock, and the
assumption of $2.2 billion of LG&E Energy's debt. Pursuant to the acquisition
agreement (the "Merger Agreement"), among other things, LG&E Energy will become
a wholly-owned subsidiary of PowerGen. The utility operations of LG&E Energy,
including LG&E, will continue their separate identities and their preferred
stock and debt will not be affected by the transaction. The acquisition (the
"PowerGen Merger") is subject to a number of conditions precedent, including
approval of the holders of LG&E Energy common stock and receipt of all necessary
regulatory approvals which closing is anticipated 9 to 12 months after the
announcement.
2
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The number of members of the board of directors of LG&E is currently fixed
at thirteen, pursuant to the Company's bylaws and resolutions adopted by the
Board of Directors. The directors are classified into three classes, as nearly
equal in number as possible, with respect to the time for which they are to hold
office. Generally, one class of directors is elected at each year's Annual
Meeting to serve for three-year terms and to continue in office until their
successors are elected and qualified.
At the Annual Meeting, the following four persons are proposed for election
to the Board of Directors for three-year terms expiring at the 2003 annual
meeting:
William C. Ballard, Jr.
T. Ballard Morton, Jr.
William L. Rouse, Jr.
Charles L. Shearer
All of the nominees are presently directors of LG&E Energy, LG&E and
Kentucky Utilities Company ("KU").
The Board of Directors does not know of any nominee who will be unable to
stand for election or otherwise serve as a director. If for any reason any
nominee becomes unavailable for election, the board of directors may designate a
substitute nominee, in which event the shares represented on the proxy cards
returned to LG&E will be voted for such substitute nominee, unless an
instruction to the contrary is indicated on the proxy card.
The composition of the Boards of Directors of LG&E and KU following the
completion of the PowerGen Merger is not known, but each Board is likely to
contain at least one current director or officer of LG&E Energy. Accordingly,
certain of the remaining directors of the LG&E Board may cease to serve as
directors of LG&E in the event the PowerGen Merger is completed.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ELECTION
OF THE FOUR NOMINEES AS DIRECTORS OF LG&E.
INFORMATION ABOUT DIRECTORS AND NOMINEES
The following contains certain information as of February 25, 2000,
concerning the nominees for director, as well as the directors whose terms of
office continue after the annual meeting.
NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT 2003 ANNUAL MEETING OF
SHAREHOLDERS
WILLIAM C. BALLARD, JR. (AGE 58)
Mr. Ballard has been of counsel to the law firm of
[PHOTO] Greenebaum Doll & McDonald PLLC since May 1992. He served as
Executive Vice President and Chief Financial Officer of
Humana, Inc., a healthcare services company, from 1978 until
May 1992. Mr. Ballard is a graduate of the University of
Notre Dame, and received his law degree, with honors, from
the University of Louisville School of Law. He also received
a Master of Law degree in taxation from Georgetown
University. Mr. Ballard has been a director of LG&E Energy
since August 1990, of LG&E since May 1989 and of KU since
May 1998. Mr. Ballard is also a member of the Board of
Directors of United Healthcare Corp., Health Care REIT,
Inc., Healthcare Recoveries, Inc. and Mid-America Bancorp.
3
T. BALLARD MORTON, JR. (AGE 68)
Mr. Morton has been Executive in Residence at the College of
[PHOTO] Business and Public Administration of the University of
Louisville since 1983. Mr. Morton is a graduate of Yale
University. Mr. Morton has been a director of LG&E Energy
since August 1990, of LG&E since May 1967 and of KU since
May 1998. Mr. Morton is also a member of the Board of
Directors of the Kroger Company.
WILLIAM L. ROUSE, JR. (AGE 67)
Mr. Rouse was Chairman of the Board and Chief Executive
[PHOTO] Officer and director of First Security Corporation of
Kentucky, a Lexington, Kentucky multi-bank holding company,
prior to his retirement in 1992. Mr. Rouse is a graduate of
the University of Kentucky. Mr. Rouse has been a director of
LG&E Energy and LG&E since May 1998 and of KU since 1989.
Mr. Rouse is also a member of the Board of Directors of
Ashland, Incorporated and Kentucky-American Water Company, a
subsidiary of American Water Works Company, Inc.
CHARLES L. SHEARER, PH.D. (AGE 57)
Dr. Shearer has been President of Transylvania University
[PHOTO] since July 1983. Dr. Shearer is a graduate of the University
of Kentucky and received a master's degree in diplomacy and
international commerce from that institution. He also
received a master's degree and a doctorate in economics from
Michigan State University. Dr. Shearer has been a director
of LG&E Energy and LG&E since May 1998 and of KU since 1987.
DIRECTORS WHOSE TERMS EXPIRE AT 2001 ANNUAL MEETING OF SHAREHOLDERS
OWSLEY BROWN II (AGE 57)
Mr. Brown has been the Chairman and Chief Executive Officer
[PHOTO] of Brown-Forman Corporation, a consumer products company,
since July 1995, and was President of Brown-Forman
Corporation from 1987 to 1995. Mr. Brown was first named
Chief Executive Officer of Brown-Forman Corporation in July
1994. Mr. Brown is a graduate of Yale University, and
received his master's degree in business administration from
Stanford University. He has been a director of LG&E Energy
since August 1990, of LG&E since May 1989 and of KU since
May 1998. Mr. Brown is also a member of the Board of
Directors of Brown-Forman Corporation and North American
Coal Corporation, a subsidiary of NACCO Industries, Inc.
4
J. DAVID GRISSOM (AGE 61)
Mr. Grissom has been Chairman of Mayfair Capital, Inc., a
[PHOTO] private investment firm, since April 1989. He served as
Chairman and Chief Executive Officer of Citizens Fidelity
Corporation from April 1977 until March 31, 1989. Upon the
acquisition of Citizens Fidelity Corporation by PNC
Financial Corp. in February 1987, Mr. Grissom served as Vice
Chairman and as a Director of PNC Financial Corp. until
March 1989. Mr. Grissom is a graduate of Centre College and
the University of Louisville School of Law. Mr. Grissom has
been a director of LG&E Energy since August 1990, of LG&E
since January 1982 and of KU since May 1998. He is also a
member of the Board of Directors of Providian Financial
Corporation and Churchill Downs, Inc.
CAROL M. GATTON (AGE 67)
Mr. Gatton has been Chairman and Director of Area Bancshares
[PHOTO] Corporation, an Owensboro, Kentucky bank holding company,
since April 1976. Mr. Gatton is also owner of Bill Gatton
Chevrolet-Cadillac-Isuzu in Bristol, Tennessee. Mr. Gatton
is a graduate of the University of Kentucky, and received a
master's degree in business administration from the
University of Pennsylvania, Wharton School of Business.
Mr. Gatton has been a director of LG&E Energy and LG&E since
May 1998 and of KU since 1996.
LEE T. TODD, JR., PH.D. (AGE 53)
Dr. Todd has been President and Chief Executive Officer and
[PHOTO] director of DataBeam Corporation, a Lexington, Kentucky
high-technology firm, since April 1976. Dr. Todd is a
graduate of the University of Kentucky. He also received a
master's degree and doctorate in electrical engineering from
the Massachusetts Institute of Technology. Dr. Todd has been
a director of LG&E Energy and LG&E since May 1998 and of KU
since 1995.
DIRECTORS WHOSE TERMS EXPIRE AT 2002 ANNUAL MEETING OF SHAREHOLDERS
MIRA S. BALL (AGE 65)
Mrs. Ball has been Secretary-Treasurer and Chief Financial
[PHOTO] Officer of Ball Homes, Inc., a residential developer and
property management company in Lexington, Kentucky, since
August 1959. Mrs. Ball is a graduate of the University of
Kentucky. Mrs. Ball has been a director of LG&E Energy and
LG&E since May 1998 and of KU since 1992.
5
ROGER W. HALE (AGE 56)
Mr. Hale has been a Director and Chairman of the Board and
Chief Executive Officer of LG&E Energy since August 1990.
[PHOTO1] Mr. Hale served as President of LG&E Energy from August 1990
to May 1998. Mr. Hale has also been Chief Executive Officer
and a Director of LG&E since June 1989, Chairman of the
Board of LG&E since February 1, 1990, and served as
President of LG&E from June 1989 until January 1, 1992.
Mr. Hale has been a Director and Chairman of the Board and
Chief Executive Officer of KU since May 1998. Prior to his
coming to LG&E, Mr. Hale served as Executive Vice President
of Bell South Enterprises, Inc. Mr. Hale is a graduate of
the University of Maryland, and received a master's degree
in management from the Massachusetts Institute of
Technology, Sloan School of Management. Mr. Hale is also a
member of the Board of Directors of Global TeleSystems
Group, Inc. and H&R Block, Inc.
DAVID B. LEWIS (AGE 55)
Mr. Lewis is a founding partner of the law firm of Lewis &
[PHOTO] Munday, a Professional Corporation, in Detroit, Michigan.
Since 1972, Mr. Lewis has served as Chairman of the Board
and a Director of the firm. Mr. Lewis is a graduate of
Oakland University and received his law degree from the
University of Michigan Law School. He also received a
master's degree in business administration from the
University of Chicago Graduate School of Business.
Mr. Lewis has been a director of LG&E Energy and LG&E since
November 1992 and of KU since May 1998. Mr. Lewis is also a
member of the Board of Directors of TRW, Inc., M.A. Hanna
Company and Comerica Bank, a subsidiary of Comerica
Incorporated.
ANNE H. MCNAMARA (AGE 52)
Mrs. McNamara has been Senior Vice President and General
[PHOTO] Counsel of AMR Corporation and its subsidiary, American
Airlines, Inc., since June 1988. Mrs. McNamara is a graduate
of Vassar College, and received her law degree from Cornell
University. She has been a director of LG&E Energy and LG&E
since November 1991 and of KU since May 1998. Mrs. McNamara
is also a member of the Board of Directors of The SABRE
Group Holdings, Inc.
FRANK V. RAMSEY, JR. (AGE 68)
Mr. Ramsey has been President and a Director of Dixon Bank,
[PHOTO] Dixon, Kentucky, since October 1972. Mr. Ramsey is a
graduate of the University of Kentucky. Mr. Ramsey has been
a director of LG&E Energy and LG&E since May 1998 and of KU
since 1986.
6
INFORMATION CONCERNING THE BOARD OF DIRECTORS
Each member of the Board of Directors of LG&E is also a director of LG&E
Energy and KU. The committees of the Board of Directors of LG&E include an Audit
Committee, a Compensation Committee and a Nominating and Governance Committee.
Pursuant to board and committee resolutions, the Long-Range Planning Committee
was discontinued in December 1999. The directors who are members of the various
committees of LG&E serve in the same capacity for purposes of the LG&E Energy
and KU Boards of Directors.
During 1999, there were a total of 11 meetings of the LG&E Board. All
directors attended 75% or more of the total number of meetings of the Board of
Directors and committees of the Board on which they served.
COMPENSATION OF DIRECTORS
Directors who are also officers of LG&E Energy or its subsidiaries receive
no compensation in their capacities as directors. During 1999, non-employee
directors received a retainer of approximately $2,333 per month, or $28,000
annually ($30,000 annually for committee chairmen), a fee for Board meetings of
$1,100 per meeting, a fee for each committee meeting of $1,000 and, where
appropriate, reimbursement for expenses incurred in traveling to meetings.
Non-employee directors residing out of Kentucky received an additional $1,000
compensation for each Board or committee meeting they attended. The foregoing
amounts represent the aggregate fees paid to directors in their capacities as
directors of LG&E Energy, LG&E and KU during 1999.
Non-employee directors of LG&E may elect to defer all or a part of their
fees (including retainers, fees for attendance at regular and annual meetings,
committee meetings and travel compensation) pursuant to the LG&E Energy Corp.
Deferred Stock Compensation Plan (the "Deferred Stock Plan"). Each deferred
amount is credited by LG&E Energy to a bookkeeping account and then is converted
into a stock equivalent on the date the amount is credited. The number of stock
equivalents credited to the director is based upon the average of the high and
the low sale price of LG&E Energy common stock on the New York Stock Exchange
for the five trading days prior to the conversion. Additional stock equivalents
will be added to stock accounts at the time that dividends are declared on LG&E
Energy common stock, in an amount equal to the amount of LG&E Energy common
stock that could be purchased with dividends that would be paid on the stock
equivalents if converted to LG&E Energy common stock. In the event that LG&E
Energy is a party to any consolidation, recapitalization, merger, share exchange
or other business combination such as the proposed PowerGen Merger in which all
or a part of the outstanding LG&E Energy common stock is changed into or
exchanged for stock or other securities of the other entity or LG&E Energy, or
for cash or other property, the stock account of a participating director shall
be converted to such new securities or consideration equal to the amount each
share of LG&E Energy common stock received, multiplied by the number of share
equivalents in the stock account. Accordingly, if the PowerGen Merger is
completed, each share equivalent will be converted into the right to receive
$24.85 in cash, without interest.
A director will be eligible to receive a distribution from his or her
account only upon termination of service by death, retirement or otherwise.
Following departure from the Board, the distribution will occur, at the
director's election, either in one lump sum or in no more than five annual
installments. The distribution will be made, at the director's election, either
in LG&E Energy common stock or in cash equal to the then-market price of the
LG&E Energy common stock allocated to the director's stock account. At February
25, 2000, 7 directors of LG&E were participating in the Deferred Stock Plan.
Non-employee directors also receive stock options pursuant to the LG&E
Energy Corp. Stock Option Plan for Non-Employee Directors (the "Directors'
Option Plan"), which was approved by LG&E Energy's shareholders at the 1994
Annual Meeting. Under the terms of the Directors' Option Plan, upon initial
election or appointment to the Board, each new director, who has not been an
7
employee or officer of LG&E Energy within the preceding three years, receives an
option grant for 4,000 shares of LG&E Energy common stock. Following the initial
grant, eligible directors receive an annual option grant of 4,000 shares on the
first Wednesday of each February. Option grants for 1994-1996 were for 2,000
shares, all of which were adjusted in April 1996 to reflect a two-for-one stock
split. The option exercise price per share for each share of LG&E Energy common
stock is the fair market value at the time of grant. Options granted are not
exercisable during the first twelve months from the date of grant and will
terminate 10 years from the date of grant. In the event of a tender offer or an
exchange offer for shares of LG&E Energy common stock, all then exercisable, but
unexercised options granted under the Directors' Option Plan will continue to be
exercisable for thirty days following the first purchase of shares pursuant to
such tender or exchange offer.
The Directors' Option Plan authorizes the issuance of up to 500,000 shares
of LG&E Energy common stock, of which 295,000 shares are subject to existing
options at a weighted average per share price of $21.93. As of March 31, 2000,
each non-employee director held 24,000 exercisable options and 4,000
unexercisable options to purchase LG&E Energy Common Stock, with the exception
of Mrs. McNamara, who held 23,000 exercisable options and 4,000 unexercisable
options each, and Messrs. Gatton, Ramsey and Rouse, Mrs. Ball and Drs. Shearer
and Todd, who each held 8,000 exercisable and 4,000 unexercisable options. The
number of shares subject to the Directors' Option Plan and subject to awards
outstanding under the plan will adjust with any stock dividend or split,
recapitalization, reclassification, merger, consolidation, combination or
exchange of shares, or any similar corporate change. Pursuant to the Merger
Agreement, options held by a director under the Directors' Option Plan will be
converted upon completion of the PowerGen Merger at the director's option into
either option to acquire American Depositary Shares ("ADS") of PowerGen (at an
agreed upon exchange ratio) or cash.
AUDIT COMMITTEE
The Audit Committee of the Board is composed of Messrs. Ballard, Brown,
Gatton, Grissom, Lewis and Ramsey, Mrs. Ball and Drs. Shearer and Todd. During
1999, the Audit Committee maintained direct contact with the independent
auditors and LG&E's Internal Auditor to review the following matters pertaining
to LG&E and to LG&E Energy and its subsidiaries, including KU: the adequacy of
accounting and financial reporting procedures; the adequacy and effectiveness of
internal accounting controls; the scope and results of the annual audit and any
other matters relative to the audit of these companies' accounts and financial
affairs that the Audit Committee, the Internal Auditor, or the independent
auditors deemed necessary. The Audit Committee met four times during 1999.
COMPENSATION COMMITTEE
The Compensation Committee, composed of non-employee directors, approves the
compensation of the Chief Executive Officer and the executive officers of LG&E
Energy, LG&E and KU. The Committee makes recommendations to the full Board
regarding benefits provided to executive officers and the establishment of
various employee benefit plans. The members of the Compensation Committee are
Messrs. Gatton, Grissom, Morton, Ramsey and Rouse and Mrs. McNamara. The
Compensation Committee met five times during 1999.
NOMINATING AND GOVERNANCE COMMITTEE
The Nominating and Governance Committee is composed of the Chairman of the
Board and certain other directors. The Committee reviews and recommends to the
Board of Directors nominees to serve on the Board and their compensation. The
Committee considers nominees suggested by other members of the Board, by members
of management and by shareholders. To be considered for inclusion in the slate
of nominees proposed by the Board of Directors at an annual meeting, shareholder
recommendations must be submitted in writing to the Secretary of LG&E not later
than 120 days prior to the annual meeting. In addition, the Articles of
Incorporation and bylaws of LG&E
8
contain procedures governing shareholder nominations for election of directors
at a shareholders' meeting. The Chairman of the Annual Meeting may refuse to
acknowledge the nomination of any person not made in compliance with these
procedures. The members of the Nominating and Governance Committee are
Messrs. Ballard, Brown, Hale (ex officio), Lewis, Ramsey and Rouse, Mrs. Ball
and Mrs. McNamara and Dr. Shearer. The Nominating and Governance Committee met
three times during 1999.
PROPOSAL NO. 2
APPROVAL OF INDEPENDENT AUDITORS FOR 2000
Based upon the recommendation of the Audit Committee, the Board of
Directors, subject to ratification by shareholders, has selected Arthur Andersen
LLP as independent auditors to audit the accounts of LG&E for the fiscal year
ending December 31, 2000. Arthur Andersen has audited the accounts of LG&E
Energy since its organization in 1990, and has audited the accounts of LG&E (as
well as those of KU) for many years. The shareholders previously approved the
employment of the firm at the Annual Meeting on April 21, 1999.
Representatives of Arthur Andersen LLP will be present at the annual
meeting. Such representatives will be given the opportunity to make a statement
if they so desire, and will be available to respond to appropriate questions.
As previously stated, LG&E Energy intends to vote all of the outstanding
shares of common stock of the Company in favor of approval of the appointment of
Arthur Andersen LLP as independent auditors, and since LG&E Energy's ownership
of such common stock represents over 96% of the voting power of the Company, the
approval of such independent auditors is assured.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
APPROVAL OF THE APPOINTMENT OF THE INDEPENDENT AUDITORS.
9
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors ("Committee") is
comprised wholly of non-employee directors and makes all decisions regarding the
compensation of LG&E's executive officers, including the setting of base pay and
the administration of LG&E Energy's Omnibus Long-Term Incentive Plan (the
"Long-Term Plan") and Short-Term Incentive Plan (the "Short-Term Plan"), each as
defined herein.
The Company's executive compensation program and the target awards and
opportunities for executives are designed to be competitive with the
compensation and pay programs of comparable companies, including utilities,
utility holding companies and companies in general industry nationwide. The
executive compensation program has been developed and implemented over time
through consultation with, and upon the recommendations of, nationally-
recognized executive compensation consultants. The Committee and the Board of
Directors have continued access to such consultants as desired, and are provided
with independent compensation data for their review.
LG&E is a principal subsidiary of LG&E Energy. As noted above, the members
of the committees and of Board of Directors of LG&E also serve in the same
capacity for LG&E Energy. Certain executive officers of LG&E are also executive
officers of LG&E Energy. For those individuals, references below to the
Committee and Board of Directors refer to the Compensation Committee and Board
of Directors of both LG&E and LG&E Energy unless otherwise indicated, and
discussions of their compensation include compensation earned for services to
both LG&E and LG&E Energy. Set forth below is a report submitted by the members
of the Committee addressing LG&E Energy's compensation policies during 1999 for
officers of LG&E and LG&E Energy, including the executive officers named in the
following tables.
COMPENSATION PHILOSOPHY
There are three major components of LG&E's and LG&E Energy's executive
compensation program: (1) base salary; (2) short-term or annual incentives; and
(3) long-term incentives. LG&E Energy developed its executive compensation
program to focus on both short-term and long-term business objectives that are
designed to enhance overall shareholder value. The short-term and long-term
incentives are premised on the belief that the interests of executives should be
closely aligned with those of LG&E Energy's shareholders. Based on this
philosophy, these two portions of each executive's total compensation package
are placed at risk and are linked to the accomplishment of specific results that
are designed to benefit LG&E Energy's shareholders in both the short-term and
long-term. Under this pay-for-performance approach, a highly competitive level
of compensation can be earned in years of strong performance. Conversely, in
years of below-average performance, compensation may decline below competitive
benchmarks.
The executive compensation program also recognizes that LG&E's and LG&E
Energy's compensation practices must be competitive not only with utilities and
utility holding companies, but also with companies in general industry to ensure
that a stable and successful management team can be recruited and retained. The
Committee believes that LG&E Energy's most direct competitors for executive
talent are not limited to the companies that would be included in the utility
industry index against which shareholder returns may be compared. For this
reason, the various compensation peer groups as established below, are not the
same as the utility industry index in the Comparison of Five-Year Total Return
graph included on page 15 of this proxy statement.
Pursuant to this competitive market positioning philosophy, in establishing
compensation levels for all executive positions for 1999, the Committee reviewed
competitive compensation information for general industry companies with revenue
between $2 - $3 billion (the "Survey Group") and established targeted total
direct compensation (base salary plus short-term incentives and long-term
incentives) for each executive for 1999 to approach the 50th percentile of the
competitive range from
10
the Survey Group. Salaries, short-term incentives and long-term incentives for
1999 are described below.
The 1999 compensation information set forth in other sections of this proxy
statement, particularly with respect to the tabular information presented,
reflects the considerations set forth in this report. The Base Salary,
Short-Term Incentives, and Long-Term Incentives sections that follow address the
compensation philosophy for 1999 for all executive officers except for Mr. Roger
W. Hale. Mr. Hale's compensation is determined in accordance with the terms of
his employment agreement (See "REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE
COMPENSATION--CHIEF EXECUTIVE OFFICER COMPENSATION" on pages 13-14 of this proxy
statement for a description of his 1999 compensation).
BASE SALARY
The base salaries for LG&E and LG&E Energy executive officers for 1999 were
designed to be competitive with the Survey Group at approximately the 50th
percentile of the base salary range for executives in similar positions with
companies in the Survey Group. Actual base salaries were determined based on
individual performance and experience.
SHORT-TERM INCENTIVES
The Short-Term Plan provides for Company Performance Awards and Individual
Performance Awards, each of which is expressed as a percentage of base salary
and each of which is determined independent of the other. The Committee
established the performance goals for LG&E Energy Performance Awards and
Individual Performance Awards at the beginning of the 1999 performance year.
Payment of Company Performance Awards for executive officers was based 100% on
Net Income Available for common stock ("NIAC"), including certain adjustments
deemed appropriate by the Committee. Payment of Individual Performance Awards
was based 100% on Management Effectiveness, which includes a customer
satisfaction element for certain participants. The awards varied within the
executive officer group based upon the nature of each individual's functional
responsibilities, with more senior officers having a greater short-term award
opportunity.
For 1999, Company Performance Award targets for executive officers ranged
from 21% to 36% of base salary, and the Individual Performance Award targets
ranged from 14% to 24% of base salary. Both awards were established to be
competitive with the 50th percentile of such awards granted to comparable
executives employed by companies in the Survey Group. The individual officers
were eligible to receive from 0% to 175% of their targeted amounts, dependent
upon Company and individual performance during 1999 as measured by NIAC with
regard to Company Performance Awards, and as measured by Management
Effectiveness with regard to Individual Performance Awards.
Based upon applicable performance relative to the established targets,
payouts of Company Performance Awards for 1999 to the executive officers ranged
from 20% to 41% of base salary, and payouts for the Individual Performance
Awards to the executive officers ranged from 13% to 40% of base salary.
LONG-TERM INCENTIVES
The Long-Term Plan is administered by a committee of not less than three
non-employee directors of LG&E Energy who are appointed by the Board of
Directors. At this time, the Committee administers the Long-Term Plan. The
Long-Term Plan provides for the grant of any or all of the following types of
awards: stock options, stock appreciation rights, restricted stock, performance
units and performance shares. In 1999, the Committee chose to award stock
options and performance units to executive officers.
The Committee determined the competitive long-term grants to be awarded for
each executive based on the long-term awards for the 50th percentile of the
Survey Group. The aggregate expected value of the stock options and performance
units (delivered 50% in the form of performance units and 50% in the form of
nonqualified stock options in 1999) was intended to approach the expected value
of
11
long-term incentives payable to executives in similar positions with companies
in the 50th percentile of the Survey Group, depending upon achievement of
targeted Company performance.
Stock options were granted to executive officers during the first quarter of
1999 at an exercise price equal to the fair market value at the time of grant
and were subject to a one-year vesting requirement. During the year, newly hired
or promoted officers were also eligible to receive pro-rated stock option grants
under the Long-Term Plan. Since options were granted with an exercise price
equal to the market value of the common stock at the time of grant, they provide
no value unless LG&E Energy's stock price increases after the grants are
awarded. Once the options vest, they are exercisable over a nine-year term.
These awards are thus tied to stock price appreciation in excess of the stock's
value at time of grant, rewarding executives as if they shared in the ownership
of LG&E Energy. The number of shares subject to options was determined by taking
the expected value to be provided in options, as determined above, and dividing
that amount by the estimated current value of an option using a variation of the
Black-Scholes Option Pricing methodology provided by the outside compensation
consultant. Prior awards were not considered when making new grants. Pursuant to
the Merger Agreement, outstanding options will be converted upon the
effectiveness of the PowerGen Merger at the election of the holder of the option
into either options to acquire ADS's of PowerGen (at an agreed upon exchange
ratio) or cash.
The number of performance units granted was determined by taking the amount
of the executive's long term award to be delivered in performance units
(adjusted on a present value basis), as determined above, and dividing that
amount by the fair market value of LG&E Energy Common Stock on the date of the
grant. The value of the performance units is substantially dependent upon the
changing value of LG&E Energy's Common Stock in the marketplace. Each executive
officer is entitled to receive from 0% to 150% of the performance units
contingently awarded to the executive based on LG&E Energy's total shareholder
return over a three-year period (defined as share price increase plus dividends
paid, divided by share price at beginning of the period) measured against the
total shareholder return for such period ("TSR") by a peer group selected by the
Committee. The peer group for measuring LG&E Energy's TSR performance (the
"Long-Term Plan Peer Group") consists of approximately 80 utility holding
companies and gas and electric utilities.(1) If the Merger Agreement is approved
by LG&E Energy's shareholders, all outstanding performance units will be paid
out in cash, based upon either the extent to which performance goals have been
met at such date (as determined by the Committee) or on the value of the award
at the time of grant, whichever amount is higher.
Under the Long-Term Plan, based on Company performance during the 1997-1999
period, no payouts of long-term incentive awards were made for such period.
During such period, LG&E Energy's performance was at the 4th percentile of its
comparison group with respect to TSR.
CHIEF EXECUTIVE OFFICER COMPENSATION
The compensation of the Chief Executive Officer of LG&E and LG&E Energy,
Mr. Roger W. Hale, is governed by the terms of an employment agreement.
Following commencement of his service with LG&E in April 1989, Mr. Hale's
employment agreement has been periodically updated by the board to recognize his
fundamental role in establishing LG&E Energy as a national and international
diversified energy services company. Mr. Hale's current employment agreement
(the "1998 Agreement") became effective in 1998 and provides for a term ending
on May 4, 2003. (See "EXECUTIVE COMPENSATION AND OTHER INFORMATION V. EMPLOYMENT
CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE IN CONTROL
PROVISIONS" on pages 20-21 of this proxy statement.)
- ------------------------
(1)While similar, the utilities and holding companies that are in the Long-Term
Plan Peer Group are not necessarily the same as those in the Standard &
Poor's Utility Index used in LG&E Energy Performance Graph on page 15 of
this proxy statement or the Survey Group. Nevertheless, in the judgment of
the Committee, the companies in the Long-Term Plan Peer Group continue to
represent the appropriate peer group for performance unit compensation
purposes.
12
The 1998 Agreement established the minimum levels of Mr. Hale's 1999
compensation, although the Committee retains discretion to increase such
compensation. For 1999, the Committee compared Mr. Hale's compensation to that
of chief executive officers of companies contained in the Survey Group as well
as electric and gas utilities and utility holding companies with comparable
revenues, market capitalization and asset size. In setting long-term awards,
LG&E Energy also considered survey data from various compensation consulting
firms. Mr. Hale also receives LG&E Energy contributions to the savings plan,
similar to those of other officers and employees. Details of Mr. Hale's 1999
compensation are set forth below.
BASE SALARY. Mr. Hale was paid a total base salary of $770,000 during 1999.
This amount was based upon the minimum salary amount provided in the 1998
Agreement, plus prior increases awarded by the Committee. The Committee, in
determining Mr. Hale's annual salary, including increases, focused on his
individual performance (including his management effectiveness, as described
below), the growth of LG&E Energy and the compensation provided to other LG&E
Energy, LG&E and KU officers. The 1999 increase, granted in February 1999, was
10%.
SHORT-TERM INCENTIVES. Mr. Hale's target short-term incentive award was 65%
of his 1999 base salary. Like all other executive officers receiving short-term
incentive awards, Mr. Hale was eligible to receive more or less than the
targeted amount, based on Company performance and individual performance. His
1999 short-term incentive payouts were based 60% on Company Performance Goals
and 40% on Individual Performance Goals.
For 1999, the Company Performance Award payout for Mr. Hale was 46% of his
1999 base salary and the Individual Performance Award payout was 46% of his 1999
base salary. The Committee considered Mr. Hale's effectiveness in several areas
in determining the final Individual Performance Award. These included the
financial and operational performance of LG&E Energy, LG&E, KU and other
subsidiaries, customer satisfaction ratings, Company growth and other measures.
LONG-TERM INCENTIVE GRANT. In 1999, Mr. Hale received 102,122 nonqualified
stock options and 39,346 performance units for the 1999-2001 performance period.
These amounts were determined in accordance with the terms of his 1998 Agreement
and provide expected value representing approximately 150% of his base salary.
The terms of the options and performance units for Mr. Hale are the same as for
other executive officers, as described under the heading "REPORT OF THE
COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION--LONG-TERM INCENTIVES."
LONG-TERM INCENTIVE PAYOUT. Under the Long-Term Plan, based on Company
performance during the 1997-1999 period, no payout of long-term incentive awards
were made to Mr. Hale. During such period, LG&E Energy's performance was at the
4th percentile of its comparison group with respect to TSR.
RESTRICTED STOCK GRANTS. During 1999, the Committee awarded Mr. Hale
135,000 shares of restricted stock under the Long-Term Plan as an inducement for
him to continue his employment with LG&E Energy. These awards are designed to
ensure Mr. Hale's continued leadership during the upcoming period of strategic
transition in the energy services industry and in recognition of increasing
competition among industry participants for the services of innovative chief
executive officers. These awards do not represent currently-realizable
compensation to Mr. Hale. Rather, these restricted shares, including reinvested
dividends, will vest only in the event of his continued employment with LG&E
Energy through May 4, 2003, the term of his current employment agreement. Prior
to their vesting, all restricted shares are subject to forfeiture upon
termination of Mr. Hale's employment for any reason other than death, disability
or termination following a change of control. Pursuant to Mr. Hale's new
employment agreement, which will only become effective if the merger is
completed, each share of restricted stock (including shares acquired with
reinvested dividends) will be converted into the right to receive $24.85 in
cash, without interest.
13
TAX MATTERS
Section 162(m) of the Code was enacted in 1993 and generally prohibits LG&E
Energy from deducting executive compensation in excess of $1,000,000. Qualifying
"performance based compensation" is not subject to this deduction limitation if
certain requirements are satisfied. It is the Committee's general intent to
preserve the deductibility of executive compensation to the extent reasonably
practicable and to the extent consistent with its other compensation objectives.
In an effort to ensure that certain compensation payable under the Long-Term
Plan and Short-Term Plan remain deductible, the Committee and the Board of
Directors recommended, and the shareholders approved, modification of the
Long-Term Plan and adoption of a new Short-Term Plan in 1996, although not all
of the compensation paid to executive officers under these two plans constitutes
performance based compensation. A portion of compensation received by Mr. Hale
in 1999 was not deductible.
CONCLUSION
The Committee believes that LG&E Energy's executive compensation system
served the interests of LG&E Energy and its shareholders effectively during
1999. The Committee takes very seriously its responsibilities with respect to
LG&E Energy's executive compensation system, and it will continue to monitor and
revise the compensation policies as necessary to ensure that LG&E Energy's
compensation system continues to meet the needs of LG&E Energy and its
shareholders.
MEMBERS OF THE COMMITTEE
J. David Grissom, Chairman
Carol M. Gatton
Anne H. McNamara
T. Ballard Morton, Jr.
William L. Rouse, Jr.
Lee T. Todd, Jr.
14
COMPANY PERFORMANCE
All of the outstanding Common Stock of LG&E is owned by LG&E Energy and,
accordingly, there are no trading prices for LG&E's Common Stock. The following
graph reflects a comparison of the cumulative total return (change in stock
price plus reinvested dividends) to shareholders of LG&E Energy common stock
from December 31, 1994, through December 31, 1999, with the Standard & Poor's
500 Composite Index and the Standard & Poor's Utility Index. The comparisons in
this table are required by the Securities and Exchange Commission and,
therefore, are not intended to forecast or be indicative of possible future
performance of LG&E Energy common stock.
COMPARISON OF FIVE YEAR CUMULATIVE
TOTAL SHAREHOLDER RETURN (1)
DATA POINTS (IN $)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
LG&E ENERGY S&P UTILITIES S&P
500
1994 100 100 100
1995 121 141 137
1996 146 145 168
1997 155 179 224
1998 184 205 287
1999 122 187 347
- ------------------------
(1) Total Shareholder Return assumes $100 invested on December 31, 1994, with
quarterly reinvestment of dividends.
15
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table shows the cash compensation paid or to be paid by LG&E
Energy or any of its subsidiaries, as well as certain other compensation paid or
accrued for those years, to the Chief Executive Officer and the next four
highest compensated executive officers of LG&E Energy who were serving as such
at December 31, 1999, in all capacities in which they served during 1997, 1998
and 1999:
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
---------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- ------------ ------------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP
NAME AND SALARY BONUS COMP. STOCK OPTIONS/SARS PAYOUTS
PRINCIPAL POSITION YEAR ($) ($) ($) AWARDS ($) (#) ($)(1)
- ------------------------- -------- -------- -------- -------- ------------ --------------- ------------
Roger W. Hale 1999 770,000 703,800 47,599 2,919,489 102,122 0
Chairman of the Board See Note (3) See Note (1)
and Chief Executive 1998 700,000 649,800 32,301 -- 133,588 821,581
Officer 1997 580,000 311,808 18,212 -- 67,728 313,037
R. Foster Duncan 1999 325,000 215,788 52,440 -- 34,483 0(1)
Executive Vice 1998 262,903(4) 210,000 69,687(4) -- 81,221 0
President and Chief
Financial Officer
Stephen R. Wood 1999 285,000 166,127 6,854 -- 26,459 0(1)
Group Executive-- 1998 265,000 120,711 7,373 -- 42,799 94,543
Retail Business 1997 245,000 138,039 6,849 -- 15,605 32,306
John R. McCall 1999 300,000 204,930 7,171 -- 31,830 0(1)
Executive Vice 1998 260,000 140,399 7,870 -- 34,733 96,635
President, 1997 245,000 114,764 6,922 -- 15,605 32,306
General Counsel and
Corporate Secretary
Wayne T. Lucas 1999 273,000 154,818 2,919 -- 25,345 0(1)
Executive Vice 1998 252,035 161,822 1,307 -- 23,028 0
President-- 1997 215,792 69,555 1,271 -- -- 29,576
Power Generation
ALL OTHER
NAME AND COMPENSATION
PRINCIPAL POSITION ($)
- ------------------------- ---------------
Roger W. Hale 55,596(2)
Chairman of the Board
and Chief Executive 36,191
Officer 26,675
R. Foster Duncan 15,623(2)
Executive Vice 4,785
President and Chief
Financial Officer
Stephen R. Wood 18,593(2)
Group Executive-- 13,377
Retail Business 8,721
John R. McCall 17,252(2)
Executive Vice 15,582
President, 11,414
General Counsel and
Corporate Secretary
Wayne T. Lucas 15,544
Executive Vice 9,500
President-- 4,750
Power Generation
- ------------------------
(1) Due to LG&E Energy stock performance compared to peer group, no Long-Term
Plan payouts were made for 1997-1999 performance cycle.
(2) Includes employer contributions to 401(k) plan, nonqualified thrift plan
and employer paid life insurance premiums in 1999 as follows: Mr. Hale
$4,358, $18,288 and $32,950, respectively; Mr. Duncan $4,775, $10,113 and
$735, respectively; Mr. Wood $4,050, $8,121 and $6,422, respectively;
Mr. McCall $4,662, $8,250 and $4,340, respectively and Mr. Lucas $3,336,
$7,508 and $4,700, respectively;.
(3) Amount shown represents dollar value of restricted stock awards, determined
by multiplying the number of shares in each award by the closing market
price as of the receipt date of grant. These awards do not represent
currently-realizable compensation to Mr. Hale. The restricted shares are
forfeited in the event Mr. Hale's employment is terminated for any reason
prior to May 4, 2003, the term of his current employment agreement, other
than due to death, disability or termination following a change in control.
Under Mr. Hale's new employment agreement, the restricted shares will be
converted to a right to receive merger consideration of $24.85 per share in
cash, without interest. Income tax is payable upon the awards at the time
of their vesting. Dividends are paid in the form of additional grants of
restricted shares representing reinvested dividends and are subject to the
same vesting date and conditions as the initial grant. At December 31,
1999,
16
the aggregate restricted stock holdings of Mr. Hale were 137,571 shares
($2,398,894) valued at such year-end closing market price.
(4) Reported compensation is only for a portion of the year. Mr. Duncan joined
LG&E Energy on January 12, 1998. Other Annual Compensation for that year
includes a relocation payment of $68,686.
OPTION/SAR GRANTS TABLE
OPTION/SAR GRANTS IN 1999 FISCAL YEAR
The following table contains information at December 31, 1999, with respect
to grants of stock options and stock appreciation rights (SARs) to the named
executive officers:
INDIVIDUAL GRANTS POTENTIAL
--------------------------------- REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL
SECURITIES TOTAL RATES OF STOCK
UNDERLYING OPTIONS/SARS EXERCISE PRICE APPRECIATION
OPTIONS/SARS GRANTED TO OR BASE FOR OPTION TERM
GRANTED (#) EMPLOYEES IN PRICE EXPIRATION --------------------------------
NAME (1) FISCAL YEAR ($/SHARE) DATE 0%($) 5%($) 10%($)
- --------------------- --------------- --------------- ---------- ------------ -------- --------- ---------
Roger W. Hale 102,122 16.8% 25.75 02/03/2009 0 1,653,767 3,819,887
R. Foster Duncan 34,483 5.7% 25.75 02/03/2009 0 558,419 1,289,841
Stephen R. Wood 26,459 4.3% 25.75 02/03/2009 0 428,478 989,702
John R. McCall 31,830 5.2% 25.75 02/03/2009 0 515,456 1,190,605
Wayne T. Lucas 25,345 4.2% 25.75 02/03/2009 0 410,438 948,033
- ------------------------
(1) Options are awarded at fair market value at time of grant; unless otherwise
indicated, options vest in one year and are exercisable over a ten-year
term.
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN 1999 FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table sets forth information with respect to the named
executive officers concerning the exercise of options and/or SARs during 1999
and the value of unexercised options and SARs held by them as of December 31,
1999:
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES IN -THE -
UNDERLYING MONEY
SHARES UNEXERCISED OPTIONS/SARS
ACQUIRED OPTIONS/SARS AT FY-END
ON VALUE AT FY-END (#) ($)(1)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------------------------------- ---------- --------- --------------- ----------------
Roger W. Hale 0 N/A 269,630/102,122 0/0
R. Foster Duncan 0 N/A 81,221/34,413 0/0
Stephen R. Wood 0 N/A 88,808/26,459 29,956/0
John R. McCall 0 N/A 72,384/31,830 0/0
Wayne T. Lucas 0 N/A 23,028/25,345 0/0
- ------------------------
(1) Dollar amounts reflect market value of LG&E Energy common stock at
year-end, minus the exercise price.
17
LONG-TERM INCENTIVE PLAN AWARDS TABLE
LONG-TERM INCENTIVE PLAN AWARDS IN 1999 FISCAL YEAR
The following table provides information concerning awards made in 1999 to
the named executive officers under the Long-Term Plan.
NUMBER PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
OF SHARES, OTHER PERIOD NON-STOCK PRICE BASED PLANS
UNITS OR UNTIL (NUMBER OF SHARES) (1)
OTHER MATURATION --------------------------------------------
NAME RIGHTS OR PAYOUT THRESHOLD(#) TARGET(#) MAXIMUM(#)
- ------------------------------------ ----------- ----------------- -------------- ---------- --------------
Roger W. Hale 39,346 12/31/2001 15,738 39,346 59,019
R. Foster Duncan 6,643 12/31/2001 2,657 6,643 9,965
Stephen R. Wood 5,097 12/31/2001 2,039 5,097 7,646
John R. McCall 6,132 12/31/2001 2,453 6,132 9,198
Wayne T. Lucas 4,882 12/31/2001 1,953 4,882 7,323
- ------------------------
(1) The table indicates the number of performance units that are paid 50% in
stock and 50% in cash at maturation.
Each performance unit awarded represents the right to receive an amount
payable 50% in LG&E Energy common stock and 50% in cash on the date of payout,
the latter portion being payable in cash in order to facilitate the payment of
taxes by the recipient. The amount of the payout is determined by the then-fair
market value of LG&E Energy common stock. For awards made in 1999, the Long-
Term Plan rewards executives on a three-year rolling basis dependent upon the
total shareholder return for shareholders. The target for award eligibility
requires that LG&E Energy shareholders earn a total return at a preset level in
comparison to that of the utility holding companies and gas and electric
utilities in the Long-Term Plan Peer Group. The Committee sets a contingent
award for each management level selected to participate in the Plan and such
amount is the basis upon which incentive compensation is determined. Depending
on the level of achievement, the participant can receive from zero to 150% of
the contingent award amount. Payments made under the Long-Term Plan in 1999 are
reported in the summary compensation table for the year of payout.
18
PENSION PLANS
The following table shows the estimated pension benefits payable to a
covered participant at normal retirement age under LG&E Energy's qualified
defined benefit pension plans, as well as non-qualified supplemental pension
plans that provide benefits that would otherwise be denied participants by
reason of certain Internal Revenue Code limitations for qualified plan benefits,
based on the remuneration that is covered under the plan and years of service
with LG&E Energy and its subsidiaries:
1999 PENSION PLAN TABLE
YEARS OF SERVICE
--------------------------------------------------
REMUNERATION 15 20 25 30 OR MORE
- ------------ ---------- ---------- ---------- -----------
$ 100,000 $ 47,524 $ 47,524 $ 47,524 $ 55,433
$ 150,000 $ 79,524 $ 79,524 $ 79,524 $ 85,133
$ 200,000 $ 111,524 $ 111,524 $ 111,524 $ 111,524
$ 250,000 $ 143,524 $ 143,524 $ 143,524 $ 143,524
$ 300,000 $ 175,524 $ 175,524 $ 175,524 $ 175,524
$ 350,000 $ 207,524 $ 207,524 $ 207,524 $ 207,524
$ 400,000 $ 239,524 $ 239,524 $ 239,524 $ 239,524
$ 450,000 $ 271,524 $ 271,524 $ 271,524 $ 271,524
$ 500,000 $ 303,524 $ 303,524 $ 303,524 $ 303,524
$ 550,000 $ 335,524 $ 335,524 $ 335,524 $ 335,524
$ 600,000 $ 367,524 $ 367,524 $ 367,524 $ 367,524
$ 650,000 $ 399,524 $ 399,524 $ 399,524 $ 399,524
$ 700,000 $ 431,524 $ 431,524 $ 431,524 $ 431,524
$ 750,000 $ 463,524 $ 463,524 $ 463,524 $ 463,524
$ 800,000 $ 495,524 $ 495,524 $ 495,524 $ 495,524
$ 850,000 $ 527,524 $ 527,524 $ 527,524 $ 527,524
$ 900,000 $ 559,524 $ 559,524 $ 559,524 $ 559,524
$ 950,000 $ 591,524 $ 591,524 $ 591,524 $ 591,524
$1,000,000 $ 623,524 $ 623,524 $ 623,524 $ 623,524
$1,050,000 $ 655,524 $ 655,524 $ 655,524 $ 655,524
$1,100,000 $ 687,524 $ 687,524 $ 687,524 $ 687,524
$1,150,000 $ 719,524 $ 719,524 $ 719,524 $ 719,524
$1,200,000 $ 751,524 $ 751,524 $ 751,524 $ 751,524
$1,250,000 $ 783,524 $ 783,524 $ 783,524 $ 783,524
$1,300,000 $ 815,524 $ 815,524 $ 815,524 $ 815,524
$1,350,000 $ 847,524 $ 847,524 $ 847,524 $ 847,524
$1,400,000 $ 879,524 $ 879,524 $ 879,524 $ 879,524
$1,450,000 $ 911,524 $ 911,524 $ 911,524 $ 911,524
$1,500,000 $ 943,524 $ 943,524 $ 943,524 $ 943,524
$1,550,000 $ 975,524 $ 975,524 $ 975,524 $ 975,524
$1,600,000 $1,007,524 $1,007,524 $1,007,524 $1,007,524
$1,650,000 $1,039,524 $1,039,524 $1,039,524 $1,039,524
$1,700,000 $1,071,524 $1,071,524 $1,071,524 $1,071,524
A participant's remuneration covered by the Retirement Income Plan (the
"Retirement Income Plan") is his or her average base salary and short-term
incentive payment (as reported in the Summary Compensation Table) for the five
calendar plan years during the last ten years of the participant's career for
which such average is the highest. The estimated years of service for each named
executive employed by LG&E Energy at December 31, 1999 is as follows: 33 years
for Mr. Hale; 2 years for Mr. Duncan; 5 years for Mr. McCall; 10 years for
Mr. Wood; and 30 years for Mr. Lucas. Benefits shown are computed as a straight
life single annuity beginning at age 65.
Current Federal law prohibits paying benefits under the Retirement Income
Plan in excess of $120,000 per year. Officers of LG&E Energy, LG&E and KU with
at least one year of service with any company are eligible to participate in
LG&E Energy's Supplemental Executive Retirement Plan (the "Supplemental
Executive Retirement Plan"), which is an unfunded supplemental plan that is not
19
subject to the $120,000 limit. Presently, participants in the Supplemental
Executive Retirement Plan consist of all of the eligible officers of LG&E
Energy, LG&E and KU. This plan provides generally for retirement benefits equal
to 64% of average current earnings during the final 36 months prior to
retirement, reduced by Social Security benefits, by amounts received under the
Retirement Income Plan and by benefits from other employers. As part of its
employment agreement with Mr. Hale, LG&E established a separate Supplemental
Executive Retirement Plan. The special plan generally provides for a retirement
benefit for Mr. Hale of 2% for each of his first 20 years of service with LG&E
Energy, LG&E or with certain prior employers, 1.5% for each of the next 10 years
of service and 1% for each remaining year of service completed prior to age 65,
all multiplied by Mr. Hale's final 36 months' average compensation, less
benefits payable from the Retirement Income Plan, benefits payable from any
other qualified or nonqualified plan sponsored by LG&E Energy, LG&E or certain
prior employers, and primary Social Security benefits. Under Mr. Hale's prior
employment agreement (see below), he may elect to commence payment of his
retirement benefits at age 50. If he retires prior to age 65, Mr. Hale's
benefits will be reduced by factors set forth in the prior employment agreement.
The special plan will terminate as of the closing of the merger, pursuant to
Mr. Hale's new employment agreement with LG&E Energy dated as of February 25,
2000.
The estimated annual benefits to be received under the Retirement Income
Plan and the Supplemental Executive Retirement Plan upon normal retirement at
age 65 and after deduction of Social Security benefits will be $789,649 for
Mr. Hale; $294,692 for Mr. Duncan; $275,189 for Mr. McCall; $147,172 for
Mr. Lucas; and $260,172 for Mr. Wood.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
ARRANGEMENTS AND CHANGE IN CONTROL PROVISIONS
On May 20, 1997, Mr. Hale entered into an employment agreement with LG&E
Energy for services to be provided to LG&E Energy and its subsidiaries,
including LG&E and KU with an initial term of five years ending on May 4, 2003.
Under the agreement, Mr. Hale is entitled to an annual base salary of not
less than $675,000, subject to annual review by the Compensation Committee, and
to participate in the Short-Term Plan and Long-Term Plan. Mr. Hale's agreement
with LG&E Energy provides for a short-term incentive target award of not less
than 60% of base salary and long-term incentive grants with a present value of
not less than 110% of base salary to be delivered two-thirds in the form of
performance units/shares and one-third in the form of non-qualified stock
options. In addition, the agreement provides that a life insurance policy in the
amount of not less than $2 million shall be provided to Mr. Hale at LG&E
Energy's expense. LG&E Energy's board of directors may terminate the agreement
at any time and, if it does so for reasons other than cause, LG&E Energy must
pay Mr. Hale's base salary plus his target short-term incentive award for the
remaining term of his employment contract, but not less than two years.
Mr. Hale has agreed that this agreement will terminate effective as of the
closing of the merger.
During 1998, officers of LG&E Energy and LG&E entered into revised change in
control agreements, which agreements generally provide for the benefits
described below. In the event of a change in control, all such officers of LG&E
Energy shall be entitled to the following payment if, within twenty-four months
after such change in control, they are terminated for reasons other than cause
or disability, or their employment responsibilities are altered: (1) all accrued
compensation; (2) a severance amount equal to 2.99 times the sum of (a) his or
her annual base salary and (b) his or her bonus or "target" award paid or
payable pursuant to the Short-Term Plan. Payments may be made to executives
which would equal or exceed an amount which would constitute a nondeductible
payment pursuant to Section 280G of the Code, or be subject to an excise tax
imposed by Section 4999 of the Code and, in the latter case, LG&E Energy will
"gross up" the applicable severance payments to the executive to cover any
excise taxes that may be due. The executive is entitled to receive such amounts
in a lump-sum payment within thirty days of termination. A change in control
encompasses certain merger and acquisitions, changes in Board membership and
acquisitions of voting securities of LG&E
20
Energy, and will include the merger with PowerGen. Mr. Hale has agreed that this
agreement shall terminate effective as of the closing of the merger, and in
consideration of this termination, Mr. Hale has entered into a new employment
agreement with LG&E Energy dated as of February 25, 2000. In addition, Mr. Hale
and four senior executives agreed to terminate their current change in control
agreements with LG&E Energy, in exchange for entering into new employment and
change in control severance agreements.
Also, upon a change in control of LG&E Energy, all stock-based awards shall
vest 100%, and all performance-based awards, such as performance units and
performance shares, shall immediately be paid out in cash, based upon either the
extent to which the performance goals have been met through the effective date
of the change in control (as determined by LG&E Energy's Compensation
Committee), or the value of the award at the time of the grant, whichever amount
is higher. Additionally, executives shall receive continuation of certain
welfare benefits and payments in respect of accrued but unused vacation days and
for out-placement assistance.
SHAREHOLDER PROPOSALS
FOR 2001 ANNUAL MEETING
Any shareholder may submit a proposal for consideration at the 2001 Annual
Meeting. Any shareholder desiring to submit a proposal for inclusion in the
proxy statement for consideration at the 2001 annual meeting should forward the
proposal so that it will be received at LG&E's principal executive offices no
later than December 20, 2000. Proposals received by that date that are proper
for consideration at the annual meeting and otherwise conforming to the rules of
the Securities and Exchange Commission will be included in the 2001 proxy
statement.
Under LG&E's bylaws, shareholders intending to submit a proposal in person
at the annual meeting must provide advance written notice along with other
prescribed information. In general, such notice must be received by the
Secretary of LG&E (a) not less than 90 days prior to the meeting date or (b) if
the meeting date is not publicly announced more than 100 days prior to the
meeting, by the tenth day following such announcement. Proposals not properly
submitted will be considered untimely.
OTHER MATTERS
At the annual meeting, it is intended that the first two items set forth in
the accompanying notice and described in this proxy statement will be presented.
Should any other matter be properly presented at the Annual Meeting, the persons
named in the accompanying proxy will vote upon them in accordance with their
best judgment. Any such matter must comply with those provisions of LG&E's
Articles of Incorporation requiring advance notice for new business to be acted
upon at the meeting. The Board of Directors knows of no other matters that may
be presented at the meeting.
LG&E will bear the costs of printing and preparing this proxy solicitation.
LG&E will provide copies of this proxy statement, the accompanying proxy and the
Annual Report and Appendix to brokers, dealers, banks and voting trustees, and
their nominees, for mailing to beneficial owners, and upon request therefor,
will reimburse such record holders for their reasonable expenses in forwarding
solicitation materials. In addition to using the mails, proxies may be solicited
by directors, officers and regular employees of LG&E, in person or by telephone.
LG&E has retained D.F. King & Co., Inc., a firm of professional proxy
solicitors, to assist in the solicitations at an estimated fee of $2,500 plus
reimbursement of reasonable expenses with the LG&E Annual Meeting.
ANY SHAREHOLDER MAY OBTAIN WITHOUT CHARGE A COPY OF LG&E'S ANNUAL REPORT ON
FORM 10-K, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR
1999 BY SUBMITTING A REQUEST IN WRITING TO: JOHN R. MCCALL, SECRETARY,
LOUISVILLE GAS AND ELECTRIC COMPANY, P.O. BOX 32010, 220 WEST MAIN STREET,
LOUISVILLE, KENTUCKY 40232.
21
[LOGO]
PRINTED ON RECYCLED PAPER
LOUISVILLE GAS AND ELECTRIC COMPANY
1999 FINANCIAL REPORT
LOUISVILLE GAS AND ELECTRIC COMPANY
1999 FINANCIAL REPORT
TABLE OF CONTENTS
Index of Abbreviations .................................................... 1
Selected Financial Data ................................................... 2
Management's Discussion and Analysis ...................................... 3
Statements of Income ...................................................... 13
Statements of Retained Earnings ........................................... 13
Statements of Comprehensive Income ........................................ 14
Balance Sheets ............................................................ 15
Statements of Cash Flows .................................................. 16
Statements of Capitalization .............................................. 17
Notes to Financial Statements ............................................. 18
Report of Management ...................................................... 37
Report of Independent Public Accountants .................................. 38
38
LOUISVILLE GAS AND ELECTRIC COMPANY
INDEX OF ABBREVIATIONS
Act The Clean Air Act Amendments of 1990
Capital Corp. LG&E Capital Corp.
D&P Duff & Phelps Credit Rating Co.
DSM Demand Side Management
ECR Environmental Cost Recovery
EITF Emerging Issues Task Force Issue
EPA U.S. Environmental Protection Agency
ESM Earnings Sharing Mechanism
FAC Fuel Adjustment Clause
FERC Federal Energy Regulatory Commission
FT Firm Transportation
GSC Gas Supply Clause
IBEW International Brotherhood of Electrical Workers
IMEA Illinois Municipal Electric Agency
IMPA Indiana Municipal Power Agency
Kentucky Commission Kentucky Public Service Commission
KIUC Kentucky Industrial Utility Consumers, Inc.
KU Kentucky Utilities Company
KU Energy KU Energy Corporation
Kva Kilovolt-ampere
LEM LG&E Energy Marketing Inc.
LG&E Louisville Gas and Electric Company
LG&E Energy LG&E Energy Corp.
Mcf Thousand Cubic Feet
MGP Manufactured Gas Plant
Mmbtu Million British thermal units
Moody's Moody's Investor Services, Inc.
Mw Megawatts
NAAQS National Ambient Air Quality Standards
NNS No-Notice Service
NOx Nitrogen Oxide
PBR Performance-Based Ratemaking
PUHCA Public Utility Holding Company Act of 1935
S&P Standard & Poor's Rating Services
SERP Supplemental Security Plan
SFAS Statement of Financial Accounting Standards
SIP State Implementation Plan
SO2 Sulfur Dioxide
SOP Statement of Position
Trimble County LG&E's Trimble County Unit 1
1
Louisville Gas and Electric Company
Selected Financial Data
Years Ended December 31
(Thousands of $)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Operating revenues:
Revenues $ 969,984 $ 854,556 $ 845,543 $ 821,115 $ 751,763
Provision for rate refunds (1,735) (4,500) -- -- (28,300)
----------- ----------- ----------- ----------- -----------
Total operating revenues 968,249 850,056 845,543 821,115 723,463
=========== =========== =========== =========== ===========
Net operating income:
Before unusual items 142,263 138,207 148,186 147,263 138,203
Provision for rate refunds (2,172) (2,684) -- -- (16,877)
----------- ----------- ----------- ----------- -----------
Total net operating income 140,091 135,523 148,186 147,263 121,326
=========== =========== =========== =========== ===========
Net income:
Before unusual items 108,442 104,381 113,273 107,941 100,061
Provision for rate refunds (2,172) (2,684) -- -- (16,877)
Merger costs -- (23,577) -- -- --
----------- ----------- ----------- ----------- -----------
Net income 106,270 78,120 113,273 107,941 83,184
=========== =========== =========== =========== ===========
Net income available
for common stock 101,769 73,552 108,688 103,373 76,873
=========== =========== =========== =========== ===========
Total assets 2,171,452 2,104,637 2,055,641 2,006,712 1,979,490
=========== =========== =========== =========== ===========
Long-term obligations
(including amounts
due within one year) $ 626,800 $ 626,800 $ 646,800 $ 646,800 $ 662,800
=========== =========== =========== =========== ===========
Management's Discussion and Analysis of Results of Operations and Financial
Condition and Notes to Financial Statements should be read in conjunction with
the above information.
2
Louisville Gas and Electric Company
Management's Discussion and Analysis of Results of Operations
and Financial Condition
GENERAL
The following discussion and analysis by management focuses on those factors
that had a material effect on LG&E's financial results of operations and
financial condition during 1999, 1998, and 1997 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 Louisville Gas and
Electric Company's reports to the Securities and Exchange Commission, and
Exhibit No. 99.01 to LG&E Energy's annual report on Form 10-K for the year ended
December 31, 1998.
MERGER
Effective May 4, 1998, following the receipt of all required state and federal
regulatory approvals, LG&E Energy and KU Energy merged, with LG&E Energy as the
surviving corporation. The outstanding preferred stock of LG&E, a subsidiary of
LG&E Energy, was not affected by the merger. See Note 2 of Notes to Financial
Statements.
RESULTS OF OPERATIONS
Net Income
LG&E's net income increased $28.2 million for 1999, as compared to 1998,
primarily due to non-recurring charges in 1998 for merger-related expenses of
$23.6 million, after tax. Excluding these non-recurring charges, net income
increased $4.6 million. This increase is mainly due to higher electric revenues,
lower administrative costs and operating expenses at the electric generating
stations, partially offset by higher maintenance expenses at the electric
generating stations.
Net income decreased $35.2 million for 1998, as compared to 1997, primarily due
to non-recurring charges for merger-related expenses and the ECR refund of $23.6
million and $2.7 million, after tax, respectively. Excluding these non-recurring
charges, net income decreased $8.9 million. This decrease is mainly due to
higher operating expenses at the electric generating stations and lower gas
sales, partially offset by increased electric sales.
3
Revenues
A comparison of operating revenues for the years 1999 and 1998, excluding the
provisions recorded for refunds in 1999 and in 1998, with the immediately
preceding year reflects both increases and decreases, which have been segregated
by the following principal causes (in thousands of $):
Increase (Decrease) From Prior Period
Electric Revenues Gas Revenues
Cause 1999 1998 1999 1998
----- ---- ---- ---- ----
Retail sales:
Fuel and gas supply adjustments, etc $ (2,014) $ 3,750 $ (24,791) $ (4,393)
Merger surcredit (4,194) (3,466) -- --
Performance based rate reduction (6,076) -- -- --
Demand side management/decoupling (2,985) (6,299) (6,462) (369)
Environmental cost recovery surcharge (570) (260) -- --
Variation in sales volumes 22,009 27,051 17,779 (42,418)
--------- --------- --------- ---------
Total retail sales 6,170 20,776 (13,474) (47,180)
Wholesale sales 121,996 28,398 (602) 8,720
Gas transportation-net -- -- (575) (71)
Other 1,228 (695) 685 (935)
--------- --------- --------- ---------
Total $ 129,394 $ 48,479 $ (13,966) $ (39,466)
========= ========= ========= =========
Electric revenues increased in 1999 primarily due to wholesale electric sales
and higher levels of retail sales volumes, partially offset by the PBR and
merger surcredit bill reductions. Wholesale sales increased in 1999 due to large
amounts of power available. Gas revenues decreased primarily as a result of
lower gas supply costs billed to customers through the gas supply clause,
partially offset by increased gas sales in 1999 due to colder weather.
Electric retail sales increased primarily due to the warmer weather in 1998 as
compared to 1997. Wholesale sales increased due to larger amounts of power
available for off-system sales, an increase in the unit price of the sales and
sales to KU of $11.6 million due to economic dispatch following the merger in
May 1998 of LG&E Energy and KU Energy. Gas retail sales decreased from 1997 due
to the warmer weather in 1998. Gas wholesale sales increased to $8.7 million in
1998 from zero in 1997 due to the implementation of LG&E's gas performance-based
ratemaking mechanism. See Note 3 of Notes to Financial Statements.
Expenses
Fuel for electric generation and gas supply expenses comprises a large component
of LG&E's total operating costs. LG&E's electric rates contain an FAC and gas
rates contain a GSC, whereby increases or decreases in the cost of fuel and gas
supply are reflected in base rates, subject to approval by the Kentucky
Commission. In July 1999, the Kentucky Commission approved LG&E's filing on PBR
resulting in the discontinuance of the FAC. In January 2000, the Kentucky
Commission rescinded its approval of LG&E's PBR filing and ordered the
reinstatement of the FAC. See Note 3 of Notes to Financial Statements for a
further discussion of the PBR and the FAC.
Fuel for electric generation increased $4.4 million (2.9%) in 1999 because of an
increase in generation to support increased electric sales ($7.4 million),
offset partially by a lower cost of coal burned ($3 million). Fuel expenses
incurred in 1998 increased $5.2 million (3.5%) because of higher cost of coal
burned ($6.6 million), partially offset by a decrease in generation ($1.4
million). The average delivered cost per ton of coal purchased was $21.49 in
1999, $22.38 in 1998, and $21.66 in 1997.
4
Power purchased increased $119.4 million (238%) in 1999 primarily due to
increased purchases to serve native load customers during the summer months and
off-system sales activity. Power purchased increased $32.9 million (191%) in
1998 to support the increase in wholesale sales and increased purchases from KU
of $16 million as a result of economic dispatch following the merger of the two
companies in May 1998.
Gas supply expenses decreased $11.1 million (8.9%) in 1999 primarily due to a
decrease in cost of net gas supply ($17.1 million), partially offset by an
increase in the volume of gas delivered to the distribution system ($6 million).
Gas supply expenses decreased $33 million (21%) in 1998 primarily due to a
decrease in the volume of gas delivered to the distribution system. The average
unit cost per Mcf of purchased gas was $2.99 in 1999, $3.05 in 1998 and $3.46 in
1997.
Operation expenses decreased $8.9 million (5.4%) in 1999 primarily due to
decreased costs to operate the electric generating plants ($5.7 million) and
lower administrative costs ($4.6 million). Operation expenses increased $12.8
million (8.5%) in 1998 over 1997 because of increased costs to operate electric
generating plants ($6.6 million), amortization of deferred merger costs ($1.8
million), and an increase in storm damage expenses ($1.4 million).
Maintenance expenses for 1999 increased $5.3 million (10.1%) primarily due to
increases in scheduled outages at the Mill Creek generating station units 3 and
4, and the Cane Run generating station units 4 and 6 ($2.4 million) and
increased forced outages at Mill Creek units 1 and 4 and Cane Run unit 5 ($3.9
million). In 1998 maintenance expenses increased $5.2 million (10.9%) as
compared to 1997 primarily because of an increase in scheduled outages and
general repairs at the electric generating plants ($2.2 million) and an increase
in storm damage expenses ($1.4 million).
Depreciation and amortization increased $4 million (4.3%) in 1999 over 1998 due
to additional utility plant in service. Depreciation and amortization for 1998
were approximately the same as in 1997.
LG&E incurred a pre-tax charge in the second quarter of 1998 for costs
associated with the merger of LG&E Energy and KU Energy of $32.1 million. The
corresponding tax benefit of $8.5 million is recorded in other income and
(deductions). The amount charged is in excess of the amount permitted to be
deferred as a regulatory asset by the Kentucky Commission. See Note 2 of Notes
to Financial Statements.
Interest charges for 1999 increased $1.6 million (4.5%) due to short term
borrowings and interest on debt to associated companies ($2.5 million),
partially offset by lower interest rates on variable rate debt ($.6 million).
Interest charges for 1998 decreased $2.9 million (7.3%) due to the retirement of
LG&E's 6.75% Series First Mortgage Bonds and lower variable interest rates. The
embedded cost of long-term debt was 5.46% at December 31, 1999, and 5.57% at
December 31, 1998. See Note 10 of Notes to Financial Statements.
Variations in income tax expenses are largely attributable to changes in pre-tax
income as well as non-deductible merger expenses.
The rate of inflation may have a significant impact on LG&E's operations, its
ability to control costs and the need to seek timely and adequate rate
adjustments. However, relatively low rates of inflation in the past few years
have moderated the impact on current operating results.
LIQUIDITY AND CAPITAL RESOURCES
LG&E uses net cash generated from its operations and external financing to fund
construction of plant and equipment and the payment of dividends. LG&E believes
that such sources of funds will be sufficient to meet the needs of its business
in the foreseeable future.
5
Operating Activities
Cash provided by operations was $180.5 million, $225.7 million and $185.0
million in 1999, 1998 and 1997, respectively. The 1999 decrease resulted from a
net decrease in non-cash income statement items and a net decrease in net
current assets, including decreases in accounts payable and accrued taxes. The
1998 increase was primarily due to an increase in current assets, including
increases in accounts payable and accrued taxes.
Investing Activities
LG&E's primary use of funds continues to be for capital expenditures and the
payment of dividends. Capital expenditures were $195 million, $138 million and
$111 million in 1999, 1998 and 1997, respectively. LG&E expects its capital
expenditures for 2000 and 2001 will total approximately $401 million which
consists primarily of construction estimates associated with installation of low
nitrogen oxide burner systems as described in the section titled "Environmental
Matters."
Net cash used for investment activities increased by $47.2 million in 1999
compared to 1998 and increased $10 million in 1998 compared to 1997 primarily
due to increased construction expenditures in both periods.
Financing Activities
Cash inflow from financing activities in 1999 was $26.7 million and cash
outflows for 1998 and 1997 were $107.6 million and $64.5 million, respectively.
In 1999, total debt increased by $120.1 million to $746.9 million at December
31, 1999. The increase was primarily due to funding operating expenses and
construction expenditures.
As of December 1999, LG&E had committed credit facility aggregating $200.0
million with various banks. Unused capacity under these lines were approximately
$90 million after considering the commercial paper support. The credit facility
will expire in 2001 and management expects to renegotiate the credit facility at
that time.
Future Capital Requirements
Future utility requirements may be affected in varying degrees by factors such
as load growth, changes in construction expenditure levels, rate actions by
regulatory agencies, new legislation, market entry of competing electric power
generators, changes in environmental regulations and other regulatory
requirements. LG&E anticipates to fund its requirements through additional
operating cash flow, debt or an issuance of preferred stock.
LG&E's debt ratings as of February 16, 2000, were:
Moody's S&P D&P
------- --- ----
First mortgage bonds A1 A+ AA-
Unsecured debt A2 A- A+
Preferred stock a2 BBB+ A
Commercial paper P-1 A-1 D-1
The ratings stated above reflect the downgrades received following an order from
the Kentucky Commission to reduce base rates at LG&E by $27.2 million. As of
March 21, 2000, Moody's, S&P and D&P had LG&E on Credit Watch with negative
implications. Based upon the downgrades received LG&E's cost of funds could
6
increase by .05% to .12% on short-term borrowings and .10% on new long-term
borrowings. These ratings reflect the views of Moody's, S&P and D&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.
Market Risks
LG&E is exposed to market risks from changes in interest rates and commodity
prices. To mitigate changes in cash flows attributable to these exposures, LG&E
has entered into various derivative instruments. Derivative positions are
monitored using techniques that include market value and sensitivity analysis.
Interest Rate Sensitivity
LG&E has short-term and long-term variable rate debt obligations outstanding. At
December 31, 1999, the potential change in interest expense associated with a 1%
change in base interest rates of LG&E's unswapped debt is estimated at $1.0
million.
Interest rate swaps are used to hedge LG&E's underlying variable rate debt
obligations. These swaps hedge specific debt issuance and consistent with
management's designation are accorded hedge accounting treatment.
As of December 31, 1999, LG&E had swaps with a combined notional value of $151
million. The swaps exchange floating-rate interest payments for fixed interest
payments to reduce the impact of interest rate changes on LG&E's Pollution
Control Bonds. As of December 31, 1999, 61% of the outstanding variable interest
rate borrowings were converted to fixed interest rates through swaps. The
potential loss in fair value from these positions resulting from a hypothetical
1% adverse movement in base interest rates is estimated at $2.1 million as of
December 31, 1999. Changes in the market value of these swaps if held to
maturity, as LG&E intends to do, will have no effect on LG&E's net income or
cash flow. See Note 4 of Notes to Financial Statements.
Commodity Price Sensitivity
LG&E has limited exposure to market price volatility in prices of fuel and
electricity, as long as cost-based regulations exist, including the FAC and GSC.
YEAR 2000 COMPUTER SOFTWARE ISSUE
Result of Year 2000 Preparation
The remediation efforts of LG&E in preparing for potential Year 2000 computer
problems were successful and resulted in LG&E incurring no material disruptions
in services or operations of any sort. To the extent, if any, certain third
parties such as interconnected utilities, key customers or suppliers still face
Year 2000 disruptions due to incomplete remediation, LG&E may still retain risk
related to Year 2000 issues. LG&E is not presently aware of any such situations
and does not anticipate such events will have a material effect on LG&E's
financial condition or results of operations.
Cost of Year 2000 Issues
LG&E's system modification costs related to the Year 2000 issue were expensed as
incurred, while new system installations are being capitalized pursuant to
generally accepted accounting principles. See Note 1 of Notes to Financial
Statements. Through December 1999, LG&E incurred approximately $18.6 million in
capital and operating costs in connection with the Year 2000 issue.
7
RATES AND REGULATION
LG&E is subject to the jurisdiction of the Kentucky Commission in virtually all
matters related to electric and gas utility regulation, and as such, their
accounting is subject to SFAS No. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN
TYPES OF REGULATION. Given LG&E's competitive position in the market and the
status of regulation in the states of Kentucky LG&E has no plans or intentions
to discontinue its application of SFAS No. 71. See Note 3 of Notes to Financial
Statements.
Environmental Cost Recovery
In May 1995, LG&E implemented an ECR surcharge. The Kentucky Commission's order
approving the surcharge as well as the constitutionality of the surcharge was
challenged by certain intervenors in Franklin Circuit Court. Decisions of the
Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997,
respectively, upheld the constitutionality of the ECR statute but differed on a
claim of retroactive recovery of certain amounts. Based on these decisions, the
Kentucky Commission ordered that certain surcharge revenues collected by LG&E be
subject to refund pending final determination of all appeals.
In December 1998, the Kentucky Supreme Court rendered an opinion upholding the
constitutionality of the surcharge statute but denied recovery of costs
associated with pre-1993 environmental projects through the ECR. The court
remanded the case to the Kentucky Commission to determine amounts to be refunded
for revenues collected for such pre-1993 environmental projects. Accordingly,
LG&E recorded a provision for rate refunds of $4.5 million in December 1998.
The parties to the proceedings reached a settlement agreement that was approved
in a Final Order issued by the Kentucky Commission in August 1999. This Final
Order resulted in the additional accrual of approximately $0.6 million to what
had been recorded in December 1998. The refund is being applied to customers'
bills during the twelve-month period beginning October 1999.
Future Rate Regulation
In October 1998, LG&E filed an application with the Kentucky Commission for
approval of a new method of determining electric rates that sought to provide
financial incentives for LG&E to further reduce customers' rates. The filing was
made pursuant to the September 1997 Kentucky Commission order approving the
merger of LG&E Energy and KU Energy, wherein the Kentucky Commission directed
LG&E to indicate whether they desired to remain under traditional rate of return
regulation or commence non-traditional regulation. The proposed ratemaking
method, known as PBR, included financial incentives for LG&E to reduce fuel
costs and increase generating efficiency, and to share any resulting savings
with customers. Additionally, the PBR proposal provided for financial penalties
and rewards to assure continued high quality service and reliability.
In April 1999, LG&E filed a joint agreement with KU and the Kentucky Attorney
General to adopt the PBR plan subject to certain amendments. The amended filing
included requested Kentucky Commission approval of a five-year rate reduction
plan which proposed to reduce the electric rates of LG&E by $9.4 million in the
first year (beginning July 1999), and by $3.8 million annually through June
2004. The proposed amended plan also included establishment of a $2.8 million
program for low-income customer assistance as well as extension for one
additional year of both the rate cap proposal and merger savings surcredit
established in the original merger plan of LG&E and KU. Under the rate cap
proposal, LG&E agreed, in the absence of extraordinary circumstances, not to
increase base electric rates for five years following the merger and LG&E also
agreed to refrain from filing for an increase in natural gas rates through June
2004.
In April 1999, the Kentucky Commission issued initial orders implementing the
amended PBR plan, effective
8
July 1999, and subject to modification. The Kentucky Commission also
consolidated into the continuing PBR proceedings an earlier March 1999, rate
complaint by a group of industrial intervenors, KIUC, in which KIUC requested
significant reductions in electric rates. Hearings were conducted before the
Kentucky Commission on LG&E's amended PBR plan and the KIUC rate reduction
petitions in August and September 1999. Legal briefs of the parties were filed
with the Kentucky Commission in October 1999. KIUC's position called for annual
revenue reductions for LG&E of $69.6 million.
In January 2000, the Kentucky Commission issued Orders for LG&E in the subject
cases. The Kentucky Commission ruled that LG&E should reduce base rates by $27.2
million effective with bills rendered beginning March 1, 2000. The Kentucky
Commission eliminated LG&E's proposal to operate under its PBR plan and
reinstated the fuel adjustment clause mechanism effective March 1, 2000. The
Kentucky Commission offered LG&E the opportunity to operate under an ESM for the
next three years. Under this mechanism, incremental annual earnings resulting in
a rate of return either above or below a range of 10.5% to 12.5% would be shared
60% with shareholders and 40% with ratepayers.
Later in January 2000, LG&E filed motions for correction to the January 2000
orders for computational and other errors made in the Kentucky Commission's
orders which produced overstatements in the base rate reductions to LG&E of $1.1
million. LG&E also filed motions for reconsideration with the Kentucky
Commission on a number of items in the case in late January. Certain intervening
parties in the proceedings have also filed motions for reconsideration
asserting, among other things, that the Kentucky Commission understated the
amount of base rate reductions. In February 2000, LG&E accepted the Kentucky
Commission's proposed ESM and filed an ESM tariff which contained detailed
provisions for operation of the ESM rates. Management cannot predict final
outcome of these matters before the Kentucky Commission or the timing in which
resolution of these matters will ultimately be reached.
Other Rate Matters
LG&E's rates contain a DSM provision. The provision includes a rate mechanism
that provides concurrent recovery of DSM costs and provides an incentive for
implementing DSM programs. This program had allowed LG&E to recover revenues
from lost sales associated with the DSM program (decoupling), but in 1998, LG&E
and customer interest groups requested an end to the decoupling rate mechanism.
In September 1998, the Kentucky Commission accepted LG&E's modified tariff
discontinuing the decoupling mechanism effective as of June 1, 1998.
Since October 1997, LG&E has implemented an experimental performance-based
ratemaking mechanism related to gas procurement activities and off-system gas
sales only. During the three-year test period beginning October 1997, rate
adjustments related to this mechanism will be determined for each 12-month
period beginning November 1 and ending October 31. During the first two years of
the mechanism ended October 31, 1999 and 1998, LG&E recorded $2.2 million and
$3.5 million, respectively, for its share of reduced gas costs. These amounts
are billed to customers through the gas supply clause.
Prior to implementation of the PBR in July 1999, and following its termination
in March 2000, LG&E employed an FAC mechanism, which under Kentucky law allowed
LG&E to recover from customers, the actual fuel costs associated with retail
electric sales. In February 1999, LG&E received orders from the Kentucky
Commission requiring a refund to retail electric customers of approximately $3.9
million resulting from reviews of the FAC from November 1994 through April 1998,
of which $1.9 million was refunded in April 1999 for the period beginning
November 1994 and ending October 1996. The orders changed LG&E's method of
computing fuel costs associated with electric line losses on off-system sales
appropriate for recovery through the FAC. LG&E requested that the Kentucky
Commission grant rehearing on the February orders, and further requested that
the Kentucky Commission stay the refund requirement until it could rule on the
rehearing request. The
9
Kentucky Commission granted the request for a stay, and in March 1999 granted
rehearing on the appropriate line loss factor associated with off-system sales
for the 18-month period ended April 1998. The Kentucky Commission also granted
rehearing on the KIUC's request for rehearing on the Kentucky Commission's
determination that it lacked authority to require the utilities to pay interest
on the refund amounts. The Kentucky Commission conducted a hearing on the
rehearing issues and issued a final ruling in December 1999. The Kentucky
Commission agreed with LG&E 's position on the appropriate loss factor to use in
the FAC computation and reduced the refund level for the 18-month period under
review to approximately $800,000. LG&E enacted the refund with billings in the
month of January 2000. LG&E and KIUC have each filed separate appeals from the
Kentucky Commission's February 1999 orders with the Franklin Circuit Court. A
decision on the appeals by the Court is expected in 2000.
LG&E intends to file before the end of the first quarter an application with the
Kentucky Commission for authority to increase its natural gas rates in order to
recoup higher costs for providing natural gas distribution services. LG&E
expects implementation before the end of 2000.
Kentucky PSC Administrative Case for Affiliate Transactions
In December 1997, the Kentucky Commission opened Administrative Case No. 369 to
consider Kentucky Commission policy regarding cost allocations, affiliate
transactions and codes of conduct governing the relationship between utilities
and their non-utility operations and affiliates. The Kentucky Commission intends
to address two major areas in the proceedings: the tools and conditions needed
to prevent cost shifting and cross-subsidization between regulated and
non-utility operations; and whether a code of conduct should be established to
assure that non-utility segments of the holding company are not engaged in
practices that could result in unfair competition caused by cost shifting from
the non-utility affiliate to the utility. In September 1998, the Kentucky
Commission issued a draft code of conduct and cost allocation guidelines. In
January 1999, LG&E, as well as all parties to the proceeding, filed comments on
the Kentucky Commission draft proposals. In December 1999, the Kentucky
Commission issued guidelines on cost allocation and held a hearing in January
2000, on the draft code of conduct. Management does not expect the ultimate
resolution of this matter to have a material adverse effect on LG&E's financial
position or results of operations.
Environmental Matters
The Act imposed stringent new SO2 and NOx emission limits on electric generating
units. LG&E previously had installed scrubbers on all of its generating units.
LG&E's strategy for Phase II, commencing January 1, 2000, is to use accumulated
emissions allowances to delay additional capital expenditures and may also
include fuel switching or the installation of additional scrubbers. LG&E met the
NOx emission requirements of the Act through installation of low-NOx burner
systems. LG&E's compliance plans are subject to many factors including
developments in the emission allowance and fuel markets, future regulatory and
legislative initiatives, and advances in clean air control technology. LG&E will
continue to monitor these developments to ensure that its environmental
obligations are met in the most efficient and cost-effective manner.
In September 1998, the EPA announced its final "NOx SIP call" rule requiring
significant additional reductions in NOx emissions by May 2003, in order to
mitigate alleged ozone transport to the Northeast. While each of the 22 states
covered by the rule is free to allocate its assigned NOx reductions among
various emissions sectors as it deems appropriate, the regulation may ultimately
require electric generating units to reduce their NOx emissions to 0.15
lb./Mmbtu - an 85% reduction from 1990 levels. In related proceedings in
response to petitions filed by various Northeast states, in December 1999, EPA
issued a final rule directing similar NOx reductions from a number of
specifically named electric generating units including all LG&E stations.
Several states, various labor and industry groups, and individual companies have
appealed both EPA rulings to the U.S. Court of Appeals for the Washington D.C.
Circuit. Management is currently unable to determine the outcome
10
or exact impact of this matter until such time as the courts rule on the
pending legal challenges and the states implement the final regulatory
mandate. However, if the 0.15 lb. target is ultimately imposed, LG&E will be
required to incur significant capital expenditures and increased operation
and maintenance costs for additional controls.
Subject to further study, analysis, and the outcome of pending litigation
against the EPA, LG&E estimates that it may incur approximate capital costs
for NOx compliance ranging from $65 million to reduce emissions to the level
of .25 lb./Mmbtu (Commonwealth of Kentucky's proposed NOx compliance level)
to $165 million to reduce emissions to the level of .15 lb./Mmbtu (current
EPA regulations). These costs would generally be incurred beginning in 2000.
LG&E believes its costs in this regard to be comparable to those of similarly
situated utilities with like generation assets. LG&E anticipates that such
capital and operating costs are the type of costs that are eligible for
recovery from customers under their environmental surcharge mechanisms and
believe that a significant portion of such costs could be recovered. However,
Kentucky Commission approval is necessary and there can be no guarantee of
recovery.
LG&E is also addressing other air quality issues. First, LG&E is monitoring
the status of EPA's revised NAAQS for ozone and particulate matter. In May
1999, the Washington D.C. Circuit remanded the final rule and directed EPA to
undertake additional rulemaking efforts. LG&E continues to monitor EPA
actions to challenge that ruling. Second, LG&E was notified by regulatory
agencies that the Cane Run Station may be the source of a potential
exceedance of the NAAQS that could require LG&E to incur additional capital
expenditures or accept certain emissions limitations. After reviewing
additional modeling information submitted by LG&E, in January 2000, EPA
concluded that the Cane Run Station does not contribute to any potential
NAAQS exceedance and that no further action is required from LG&E. Third,
LG&E is working with regulatory authorities to review the effectiveness of
remedial measures aimed at controlling particulate emissions from its Mill
Creek Station. LG&E previously settled a number of property damage claims
from adjacent residents and completed significant plant modifications as part
of its ongoing capital construction program.
LG&E owns or formerly owned three properties which contained past MGP
operations. Various contaminants are typically found at such former MGP sites
and environmental remediation measures are frequently required. LG&E has
reached agreements for other parties to assume cleanup responsibility for two
other sites it formerly owned. In addition, LG&E recently reached an
agreement with the Kentucky Division of Waste Management with respect to a
third LG&E-owned site in which LG&E committed to impose certain property
restrictions and conduct additional monitoring in lieu of a cleanup. Based on
currently available information, management estimates that it will incur
additional MGP costs of less than $500,000. Accordingly, an accrual of
$500,000 has been recorded in the accompanying financial statements.
See Note 12 of Notes to Financial Statements for an additional discussion of
environmental issues.
FUTURE OUTLOOK
Competition and Customer Choice
LG&E has moved aggressively over the past decade to be positioned for, and to
help promote, the energy industry's shift to customer choice and a
competitive market for energy services. Specifically, LG&E has taken many
steps to prepare for the expected increase in competition in its business,
including support for performance-based ratemaking structures, aggressive
cost reduction activities; strategic acquisitions, dispositions and growth
initiatives; write-offs of previously deferred expenses; an increase in focus
on commercial and industrial customers; an increase in employee training; and
necessary corporate and business unit realignments. LG&E continues to be
active in the national debate surrounding the restructuring of the energy
industry and the move toward a competitive, market-based environment. LG&E
has urged Congress to set a specific date for a
11
complete transition to a competitive market, one that will quickly and
efficiently bring the benefits associated with customer choice. LG&E has
previously advocated the implementation of this transition by January 1,
2001, and now recommends adoption of federal legislation specifying a date
certain and appropriate transition regulations implementing deregulation.
In December 1997, the Kentucky Commission issued a set of principles which
was intended to serve as its guide in consideration of issues relating to
industry restructuring. Among the issues addressed by these principles are:
consumer protection and benefit, system reliability, universal service,
environmental responsibility, cost allocation, stranded costs and codes of
conduct. During 1998, the Kentucky Commission and a task force of the
Kentucky General Assembly had each initiated proceedings, including meetings
with representatives of utilities, consumers, state agencies and other groups
in Kentucky, to discuss the possible structure and effects of energy industry
restructuring in Kentucky.
In November 1999, the task force issued a report to the Governor of Kentucky
and a legislative agency recommending no general electric industry
restructuring actions during the 2000 legislative session.
Thus, at the time of this report, neither the Kentucky General Assembly nor
the Kentucky Commission has adopted or approved a plan or timetable for
retail electric industry competition in Kentucky. The nature or timing of the
ultimate legislative or regulatory actions regarding industry restructuring
and their impact on LG&E, which may be significant, cannot currently be
predicted.
12
Louisville Gas and Electric Company
Statements of Income
(Thousands of $)
Years Ended December 31
1999 1998 1997
---- ---- ----
OPERATING REVENUES:
Electric ..................................... $ 792,405 $ 663,011 $ 614,532
Gas .......................................... 177,579 191,545 231,011
Provision for rate refunds (Note 3) .......... (1,735) (4,500) --
--------- --------- ---------
Net operating revenues (Note 1) ........... 968,249 850,056 845,543
--------- --------- ---------
OPERATING EXPENSES:
Fuel for electric generation ................. 159,129 154,683 149,463
Power purchased .............................. 169,573 50,176 17,229
Gas supply expenses .......................... 114,745 125,894 158,929
Other operation expenses ..................... 154,667 163,584 150,750
Maintenance .................................. 58,119 52,786 47,586
Depreciation and amortization ................ 97,221 93,178 93,020
Federal and state income taxes (Note 8) ...... 57,774 56,307 64,081
Property and other taxes ..................... 16,930 17,925 16,299
--------- --------- ---------
Total operating expenses .................. 828,158 714,533 697,357
--------- --------- ---------
Net operating income ............................. 140,091 135,523 148,186
Merger costs (Note 2) ............................ -- 32,072 --
Other income and (deductions) (Note 9) ........... 4,141 10,991 4,277
Interest charges ................................. 37,962 36,322 39,190
--------- --------- ---------
Net income ....................................... 106,270 78,120 113,273
Preferred stock dividends ........................ 4,501 4,568 4,585
--------- --------- ---------
Net income available for common stock ............ $ 101,769 $ 73,552 $ 108,688
========= ========= =========
Statements of Retained Earnings
(Thousands of $)
Years Ended December 31
1999 1998 1997
---- ---- ----
Balance January 1 ................................ $247,462 $258,910 $209,222
Add net income ................................... 106,270 78,120 113,273
-------- -------- --------
353,732 337,030 322,495
-------- -------- --------
Deduct: Cash dividends declared on stock:
5% cumulative preferred ............. 1,075 1,075 1,075
Auction rate cumulative preferred ... 1,957 2,024 2,041
$5.875 cumulative preferred ......... 1,469 1,469 1,469
Common .............................. 90,000 85,000 59,000
-------- -------- --------
94,501 89,568 63,585
-------- -------- --------
Balance December 31 .............................. $259,231 $247,462 $258,910
======== ======== ========
The accompanying notes are an integral part of these financial statements.
13
Louisville Gas and Electric Company
Statements of Comprehensive Income
(Thousands of $)
Years Ended December 31
1999 1998 1997
---- ---- ----
Net income available for common stock................................. $ 101,769 $ 73,552 $108,688
Unrealized holding losses on available-for-sale securities
arising during the period......................................... (402) (14) (426)
Reclassification adjustment for realized gains on
available-for-sale securities included in net income.............. -- -- 188
--------- -------- --------
Other comprehensive income (loss) before tax.......................... (402) (14) (238)
Income tax (expense) benefit related to items of other
comprehensive income.............................................. 163 (18) 119
--------- -------- --------
Comprehensive income.................................................. $ 101,530 $ 73,520 $108,569
========= ======== ========
The accompanying notes are an integral part of these financial statements.
14
Louisville Gas and Electric Company
Balance Sheets
(Thousands of $)
December 31
1999 1998
---- ----
ASSETS:
Utility plant, at original cost:
Electric.................................................................... $2,396,707 $2,268,860
Gas ..................................................................... 365,128 339,647
Common ..................................................................... 141,009 131,271
---------- ----------
2,902,844 2,739,778
Less: reserve for depreciation............................................. 1,215,032 1,144,123
---------- ----------
1,687,812 1,595,655
Construction work in progress............................................... 162,995 156,361
---------- ----------
1,850,807 1,752,016
---------- ----------
Other property and investments - less reserve................................... 1,224 1,154
Current assets:
Cash and temporary cash investments......................................... 54,761 31,730
Marketable securities (Note 6).............................................. 6,936 17,851
Accounts receivable - less reserve of $1,233 in 1999 and $1,399 in 1998..... 113,859 142,580
Materials and supplies - at average cost:
Fuel (predominantly coal)................................................ 17,350 23,993
Gas stored underground................................................... 38,780 33,485
Other.................................................................... 35,010 33,103
Prepayments and other....................................................... 2,775 2,285
---------- ----------
269,471 285,027
---------- ----------
Deferred debits and other assets:
Unamortized debt expense.................................................... 5,607 5,919
Regulatory assets (Note 3).................................................. 31,443 37,643
Other ..................................................................... 12,900 22,878
---------- ----------
49,950 66,440
---------- ----------
$2,171,452 $2,104,637
========== ==========
CAPITAL AND LIABILITIES:
Capitalization (see statements of capitalization):
Common equity............................................................... $ 683,376 $ 671,846
Cumulative preferred stock.................................................. 95,328 95,328
Long-term debt (Note 10).................................................... 380,600 626,800
---------- ----------
1,159,304 1,393,974
---------- ----------
Current liabilities:
Current portion of long-term debt........................................... 246,200 --
Notes payable............................................................... 120,097 --
Accounts payable............................................................ 113,008 133,673
Provision for rate refunds.................................................. 8,962 13,261
Dividends declared.......................................................... 24,236 23,168
Accrued taxes............................................................... 23,759 31,929
Accrued interest............................................................ 9,265 8,038
Other ..................................................................... 15,725 15,242
---------- ----------
561,252 225,311
---------- ----------
Deferred credits and other liabilities:
Accumulated deferred income taxes (Notes 1 and 8)........................... 255,910 254,589
Investment tax credit, in process of amortization........................... 67,253 71,542
Accumulated provision for pensions and related benefits (Note 7)............ 38,431 59,529
Customers' advances for construction........................................ 11,104 10,848
Regulatory liability (Note 3)............................................... 58,726 63,529
Other ..................................................................... 19,472 25,315
---------- ----------
450,896 485,352
---------- ----------
Commitments and contingencies (Note 12)
$2,171,452 $2,104,637
========== ==========
The accompanying notes are an integral part of these financial statements.
15
Louisville Gas and Electric Company
Statements of Cash Flows
(Thousands of $)
Years Ended December 31
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 106,270 $ 78,120 $ 113,273
Items not requiring cash currently:
Depreciation and amortization.................................. 97,221 93,178 93,020
Deferred income taxes - net.................................... (5,279) 2,747 (3,495)
Investment tax credit - net.................................... (4,289) (4,258) (4,240)
Other.......................................................... 6,924 5,534 4,640
Change in certain net current assets:
Accounts receivable............................................ 28,721 (17,708) (9,728)
Materials and supplies......................................... (559) 423 (8,492)
Accounts payable............................................... (20,665) 34,779 1,416
Provision for rate refunds..................................... (4,299) 13 (4,263)
Accrued taxes.................................................. (8,170) 13,206 6,741
Accrued interest............................................... 1,227 22 (1,978)
Prepayments and other.......................................... (7) 976 1,333
Other............................................................. (16,602) 18,679 (3,188)
----------- --------- -----------
Net cash flows from operating activities....................... 180,493 225,711 185,039
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities........................................... (1,144) (17,397) (18,529)
Proceeds from sales of securities................................. 11,662 18,841 2,544
Construction expenditures......................................... (194,644) (138,345) (110,893)
----------- --------- ---------
Net cash flows from investing activities....................... (184,126) (136,901) (126,878)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowing.............................................. 120,097 -- --
Issuance of first mortgage bonds and pollution control bonds...... -- -- 69,776
Retirement of first mortgage bonds and pollution control bonds.... -- (20,000) (71,693)
Payment of dividends.............................................. (93,433) (87,552) (62,564)
----------- --------- ---------
Net cash flows from financing activities....................... 26,664 (107,552) (64,481)
----------- --------- ---------
Change in cash and temporary cash investments......................... 23,031 (18,742) (6,320)
Cash and temporary cash investments at beginning of year.............. 31,730 50,472 56,792
----------- --------- ---------
Cash and temporary cash investments at end of year.................... $ 54,761 $ 31,730 $ 50,472
=========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes................................................... $ 76,761 $ 40,334 $ 63,421
Interest on borrowed money..................................... 33,507 34,245 39,582
The accompanying notes are an integral part of these financial statements.
16
Louisville Gas and Electric Company
Statements of Capitalization
(Thousands of $)
December 31
1999 1998
---- ----
COMMON EQUITY:
Common stock, without par value -
Authorized 75,000,000 shares, outstanding 21,294,223 shares.................. $ 425,170 $ 425,170
Common stock expense............................................................ (836) (836)
Unrealized gain (loss) on marketable securities, net of income
taxes ($128) in 1999 and $34 in 1998 (Note 6)................................ (189) 50
Retained earnings............................................................... 259,231 247,462
----------- -----------
683,376 671,846
----------- -----------
CUMULATIVE PREFERRED STOCK:
Redeemable on 30 days notice by LG&E
Shares Current
Outstanding Redemption Price
----------- ----------------
$25 par value, 1,720,000 shares authorized -
5% series .................................... 860,287 $28.00 21,507 21,507
Without par value, 6,750,000 shares authorized -
Auction rate.................................. 500,000 100.00 50,000 50,000
$5.875 series................................. 250,000 104.70 25,000 25,000
Preferred stock expense......................... (1,179) (1,179)
---------- ----------
95,328 95,328
---------- ----------
LONG-TERM DEBT (Note 10):
First mortgage bonds -
Series due July 1, 2002, 7 1/2%.............................................. 20,000 20,000
Series due August 15, 2003, 6%............................................... 42,600 42,600
Pollution control series:
P due June 15, 2015, 7.45%............................................... 25,000 25,000
Q due November 1, 2020, 7 5/8%........................................... 83,335 83,335
R due November 1, 2020, 6.55%............................................ 41,665 41,665
S due September 1, 2017, variable........................................ 31,000 31,000
T due September 1, 2017, variable........................................ 60,000 60,000
U due August 15, 2013, variable.......................................... 35,200 35,200
V due August 15, 2019, 5 5/8%............................................ 102,000 102,000
W due October 15, 2020, 5.45%............................................ 26,000 26,000
X due April 15, 2023, 5.90%.............................................. 40,000 40,000
---------- ----------
Total first mortgage bonds............................................... 506,800 506,800
Pollution control bonds (unsecured) -
Jefferson County Series due September 1, 2026, variable...................... 22,500 22,500
Trimble County Series due September 1, 2026, variable........................ 27,500 27,500
Jefferson County Series due November 1, 2027, variable....................... 35,000 35,000
Trimble County Series due November 1, 2027, variable......................... 35,000 35,000
---------- ----------
Total unsecured pollution control bonds.................................. 120,000 120,000
---------- ----------
Total bonds outstanding...................................................... 626,800 626,800
Less current portion of long-term debt....................................... 246,200 --
---------- ----------
Long-term debt............................................................... 380,600 626,800
---------- ----------
Total capitalization......................................................... $1,159,304 $1,393,974
========== ==========
The accompanying notes are an integral part of these financial statements.
17
Louisville Gas and Electric Company
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LG&E is a subsidiary of LG&E Energy. LG&E is a regulated public utility that is
engaged in the generation, transmission, distribution, and sale of electric
energy and the storage, distribution, and sale of natural gas in Louisville and
adjacent areas in Kentucky. LG&E Energy is an exempt energy services holding
company with wholly-owned subsidiaries consisting of LG&E, KU, Capital Corp.,
and LEM. All of the LG&E's Common Stock is held by LG&E Energy.
UTILITY PLANT. LG&E's plant is stated at original cost, which includes
payroll-related costs such as taxes, fringe benefits, and administrative and
general costs. Construction work in progress has been included in the rate base
for determining retail customer rates. LG&E has not recorded any allowance for
funds used during construction.
The cost of plant retired or disposed of in the normal course of business is
deducted from plant accounts and such cost, plus removal expense less salvage
value, is charged to the reserve for depreciation. When complete operating units
are disposed of, appropriate adjustments are made to the reserve for
depreciation and gains and losses, if any, are recognized.
DEPRECIATION. Depreciation is provided on the straight-line method over the
estimated service lives of depreciable plant. The amounts provided for 1999 were
3.4% (3.2% electric, 3.2% gas, and 7.1% common); for 1998 were 3.4% (3.2%
electric, 3.4% gas, and 7.4% common); and for 1997 were 3.4% (3.2% electric,
3.3% gas, and 6% common) of average depreciable plant.
CASH AND TEMPORARY CASH INVESTMENTS. LG&E considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Temporary cash investments are carried at cost, which approximates
fair value.
GAS STORED UNDERGROUND. Gas inventories of $38.8 million and $33.5 million at
December 31, 1999 and 1998, respectively, are included in gas stored underground
in the balance sheet. The inventory is accounted for using the average-cost
method.
FINANCIAL INSTRUMENTS. LG&E uses over-the-counter interest-rate swap agreements
to hedge its exposure to fluctuations in the interest rates it pays on
variable-rate debt. LG&E also uses exchange-traded U.S. Treasury note and bond
futures to hedge its exposure to fluctuations in the value of its investments in
the preferred stocks of other companies. Gains and losses on interest-rate swaps
used to hedge interest rate risk are reflected in interest charges monthly.
Gains and losses on U.S. Treasury note and bond futures used to hedge
investments in preferred stocks are initially deferred and classified as
unrealized losses on marketable securities in common equity and then charged or
credited to other income and deductions when the securities are sold. See Note
4, Financial Instruments.
In connection with LG&E's marketing of power from owned generation assets,
exchange traded futures are used to hedge its exposure to price risk. Gains and
losses on these futures contracts are reflected in other income and deductions,
but are immaterial to LG&E's results of operations. At December 31, 1999, the
value of these futures contracts was not material to LG&E's financial position.
DEBT EXPENSE. Debt expense is amortized over the lives of the related bond
issues, consistent with regulatory practices.
18
DEFERRED INCOME TAXES. Deferred income taxes have been provided for all material
book-tax temporary differences.
INVESTMENT TAX CREDITS. Investment tax credits resulted from provisions of the
tax law that permitted a reduction of LG&E's tax liability based on credits for
certain construction expenditures. Deferred investment tax credits are being
amortized to income over the estimated lives of the related property that gave
rise to the credits.
REVENUE RECOGNITION. Revenues are recorded based on service rendered to
customers through month-end. LG&E accrues an estimate for unbilled revenues from
each meter reading date to the end of the accounting period. The unbilled
revenue estimates included in accounts receivable for LG&E at December 31, 1999
and 1998, were approximately $31.1 million and $25.1 million, respectively.
Under an agreement approved by the Kentucky Commission in 1994, LG&E implemented
a demand side management program, including a "decoupling mechanism" which
allowed LG&E to recover a predetermined level of revenue on electric and gas
residential sales. In 1998, the decoupling mechanism was suspended. See Note 3,
Rates and Regulatory Matters.
FUEL AND GAS COSTS. The cost of fuel for electric generation is charged to
expense as used, and the cost of gas supply is charged to expense as delivered
to the distribution system. LG&E implemented a Kentucky Commission-approved
experimental performance-based ratemaking mechanism related to gas procurement
and off-system gas sales activity in October 1997. See Note 3, Rates and
Regulatory Matters.
MANAGEMENT'S USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported assets and liabilities
and disclosure of contingent items at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. See Note 12, Commitments and
Contingencies, for a further discussion.
NEW ACCOUNTING PRONOUNCEMENTS. During 1999 and 1998, the following accounting
pronouncements were issued that affect LG&E:
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or a liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that LG&E must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting. LG&E has not yet quantified all the effects of adopting SFAS No. 133
on the financial statements. However, SFAS No. 133 could increase the volatility
in earnings and other comprehensive income. The effect of this statement will be
recorded in cumulative effect of change in accounting when adopted. SFAS No.
137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- DEFERRAL OF
THE EFFECTIVE DATE OF SFAS NO. 133, deferred the effective date of SFAS No. 133
until January 1, 2001.
EITF No. 98-10, ACCOUNTING FOR ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES was
adopted effective January 1, 1999. The pronouncement requires that energy
trading contracts to be marked to market on the balance sheet, with the gains
and losses shown net in the income statement. EITF No. 98-10 more broadly
defines what represents energy trading to include economic activities related to
physical assets which were not previously marked to market by established
industry practice. Adoption of EITF No. 98-10 did not have a material impact on
LG&E's consolidated results of operations or financial position.
SOP 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE. Adopted
19
as of January 1, 1998, SOP 98-1 clarifies the criteria for capital or expense
treatment of costs incurred by an enterprise to develop or obtain computer
software to be used in its internal operations. The statement does not change
treatment of costs incurred in connection with correcting computer programs to
properly process the millennium change to the Year 2000, which were expensed as
incurred. Adoption of SOP 98-1 did not have a material effect on LG&E's
financial statements.
NOTE 2 - MERGER
LG&E Energy and KU Energy merged on May 4, 1998, with LG&E Energy as the
surviving corporation. As a result of the merger, the LG&E Energy, which is the
parent of LG&E, became the parent company of KU. The operating utility
subsidiaries (LG&E and KU) have continued to maintain their separate corporate
identities and serve customers in Kentucky and Virginia under their present
names. LG&E Energy has estimated approximately $760 million in gross non-fuel
savings over a ten-year period following the merger. Costs to achieve these
savings for LG&E of $50.2 million were recorded in the second quarter of 1998,
$18.1 million of which were initially deferred and are being amortized over a
five-year period pursuant to regulatory orders. Primary components of the merger
costs were separation benefits, relocation costs, and transaction fees, the
majority of which were paid by December 31, 1998. LG&E expensed the remaining
costs associated with the merger ($32.1 million) in the second quarter of 1998.
In regulatory filings associated with approval of the merger, LG&E committed not
to seek increases in existing base rates and proposed reductions in their retail
customers' bills in amounts based on one-half of the savings, net of the
deferred and amortized amount, over a five-year period. The preferred stock and
debt securities of LG&E were not affected by the merger.
LG&E Energy, as the parent of LG&E and KU, continues to be an exempt holding
company under PUHCA. Management has accounted for the merger as a pooling of
interests and as a tax-free reorganization under the Internal Revenue Code.
In the application filed with the Kentucky Commission, the utilities proposed
that 50% of the net non-fuel cost savings estimated to be achieved from the
merger, less $18.1 million or 50% of the originally estimated costs to achieve
such savings, be applied to reduce customer rates through a surcredit on
customers' bills and the remaining 50% be retained by the companies. The
Kentucky Commission approved the surcredit and allocated the customer savings
53% to KU and 47% to LG&E. The surcredit will be about 2% of customer bills over
the next five years and will amount to approximately $55 million in net non-fuel
savings to LG&E. Any fuel cost savings are passed to Kentucky customers through
the companies' fuel adjustment clauses. See Note 3 for more information about
LG&E's rates and regulatory matters.
20
NOTE 3 - RATES AND REGULATORY MATTERS
Accounting for the regulated utility business conforms with generally accepted
accounting principles as applied to regulated public utilities and as prescribed
by FERC and the Kentucky Commission. LG&E is subject to SFAS No. 71, ACCOUNTING
FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION. Under SFAS No. 71, certain costs
that would otherwise be charged to expense are deferred as regulatory assets
based on expected recovery from customers in future rates. Likewise, certain
credits that would otherwise be reflected as income are deferred as regulatory
liabilities based on expected flowback to customers in future rates. LG&E's
current or expected recovery of deferred costs and expected flowback of deferred
credits is generally based on specific ratemaking decisions or precedent for
each item. The following regulatory assets and liabilities were included in
LG&E's balance sheets as of December 31 (in thousands of $):
1999 1998
---- ----
Unamortized loss on bonds $ 16,556 $ 17,627
Merger costs 12,702 16,332
Manufactured gas sites 2,185 3,684
-------- --------
Total regulatory assets 31,443 37,643
-------- --------
Deferred income taxes - net (56,767) (63,529)
Deferred net gain (1,959) --
-------- --------
Total regulatory liabilities (58,726) (63,529)
-------- --------
Regulatory liabilities - net $(27,283) $(25,886)
======== ========
ENVIRONMENTAL COST RECOVERY. In May 1995, LG&E implemented an ECR surcharge. The
Kentucky Commission's order approving the surcharge for KU as well as the
constitutionality of the surcharge was challenged by certain intervenors in
Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of
Appeals in July 1995 and December 1997, respectively, upheld the
constitutionality of the ECR statute but differed on a claim of retroactive
recovery of certain amounts. Based on these decisions, the Kentucky Commission
ordered that certain surcharge revenues collected by LG&E be subject to refund
pending final determination of all appeals.
In December 1998, the Kentucky Supreme Court rendered an opinion upholding the
constitutionality of the surcharge statute but denied recovery of costs
associated with pre-1993 environmental projects through the ECR. The court
remanded the case to the Kentucky Commission to determine amounts to be refunded
for revenues collected for such pre-1993 environmental projects. Accordingly,
LG&E recorded a provision for rate refunds of $4.5 million in December 1998.
The parties to the proceedings reached a settlement agreement that was approved
in a Final Order issued by the Kentucky Commission in August 1999. This Final
Order resulted in the additional accrual of approximately $.6 million to what
had been recorded in December 1998. The refund is being applied to customers'
bills during the twelve-month period beginning October 1999.
FUTURE RATE REGULATION. In October 1998, LG&E filed an application with the
Kentucky Commission for approval of a new method of determining electric rates
that sought to provide continued financial incentives for LG&E to further reduce
customers' rates. The filing was made pursuant to the September 1997 Kentucky
Commission order approving the merger of LG&E Energy and KU Energy, wherein the
Kentucky Commission directed LG&E to indicate whether they desired to remain
under traditional rate of return regulation or commence non-traditional
regulation. The proposed ratemaking method, known as PBR, included financial
incentives for LG&E to reduce fuel costs and increase generating efficiency, and
to share any resulting savings
21
with customers. Additionally, the PBR proposal provided for financial penalties
and rewards to assure continued high quality service and reliability.
In April 1999, LG&E filed a joint agreement with KU and the Kentucky Attorney
General to adopt the PBR plan subject to certain amendments. The amended filing
included requested Kentucky Commission approval of a five-year rate reduction
plan which proposed to reduce the electric rates of LG&E by $9.4 million in the
first year (beginning July 1999), and by $3.8 million annually through June
2004. The proposed amended plan also included establishment by LG&E of a $2.8
million program for low-income customer assistance as well as extension for one
additional year of both the rate cap proposal and merger savings surcredit
established in the original merger plan of LG&E and KU. Under the rate cap
proposal LG&E agreed, in the absence of extraordinary circumstances, not to
increase base electric rates for five years following the merger and LG&E also
agreed to refrain from filing for an increase in natural gas rates through June
2004.
In April 1999, the Kentucky Commission issued initial orders implementing the
amended PBR plan, effective July 1999, and subject to modification. The Kentucky
Commission also consolidated into the continuing PBR proceedings an earlier
March 1999, rate complaint by a group of industrial intervenors, KIUC, in which
KIUC requested significant reductions in electric rates. Hearings were conducted
before the Kentucky Commission on LG&E's amended PBR plan and the KIUC rate
reduction petitions in August and September 1999. Legal briefs of the parties
were filed with the Kentucky Commission in October 1999. KIUC's position called
for annual revenue reductions for LG&E of $69.6 million.
In January 2000, the Kentucky Commission issued an Order for LG&E in the subject
cases. The Kentucky Commission ruled that LG&E should reduce base rates by $27.2
million effective with bills rendered beginning March 1, 2000. The Kentucky
Commission eliminated the proposal to operate under its PBR plan and reinstated
the fuel adjustment clause mechanism effective March 1, 2000. The Kentucky
Commission offered LG&E the opportunity to operate under an ESM for the next
three years. Under this mechanism, incremental annual earnings resulting in a
rate of return either above or below a range of 10.5% to 12.5% would be shared
60% with shareholders and 40% with ratepayers.
Later in January 2000, LG&E filed motions for correction to the January 2000
orders for computational and other errors made in the Kentucky Commission's
orders which produced overstatements in the base rate reductions to LG&E of $1.1
million. LG&E also filed motions for reconsideration with the Kentucky
Commission on a number of items in the case in late January. Certain intervening
parties in the proceedings have also filed motions for reconsideration
asserting, among other things, that the Kentucky Commission understated the
amount of base rate reductions.
OTHER RATE MATTERS. LG&E's rates contain a DSM provision. The provision includes
a rate mechanism that provides concurrent recovery of DSM costs and provides an
incentive for implementing DSM programs. This program had allowed LG&E to
recover revenues from lost sales associated with the DSM program (decoupling),
but in 1998, LG&E and customer interest groups requested an end to the
decoupling rate mechanism. In September 1998, the Kentucky Commission accepted
LG&E's modified tariff discontinuing the decoupling mechanism effective as of
June 1, 1998.
Since October 1997, LG&E has implemented an experimental performance-based
ratemaking mechanism related to gas procurement activities and off-system gas
sales only. During the three-year test period beginning October 1997, rate
adjustments related to this mechanism will be determined for each 12-month
period beginning November 1 and ending October 31. During the first two years of
the mechanism ended October 31, 1999 and 1998, LG&E recorded $2.2 million and
$3.5 million, respectively, for its share of reduced gas costs. These amounts
are billed to customers through the gas supply clause.
22
Prior to implementation of the PBR in July 1999, and following its termination
in March 2000, LG&E employed a FAC mechanism, which under Kentucky law allowed
LG&E to recover from customers, the actual fuel costs associated with retail
electric sales. In February 1999, LG&E received orders from the Kentucky
Commission requiring a refund to retail electric customers of approximately $3.9
million resulting from reviews of the FAC from November 1994 through April 1998,
of which $1.9 million was refunded in April 1999 for the period beginning
November 1994 and ending October 1996. The orders changed LG&E's method of
computing fuel costs associated with electric line losses on off-system sales
appropriate for recovery through the FAC. LG&E requested that the Kentucky
Commission grant rehearing on the February orders, and further requested that
the Kentucky Commission stay the refund requirement until it could rule on the
rehearing request. The Kentucky Commission granted the request for a stay, and
in March 1999 granted rehearing on the appropriate line loss factor associated
with off-system sales for the 18-month period ended April 1998. The Kentucky
Commission also granted rehearing on the KIUC's request for rehearing on the
Kentucky Commission's determination that it lacked authority to require LG&E to
pay interest on the refund amounts. The Kentucky Commission conducted a hearing
on the rehearing issues and issued a final ruling in December 1999. The Kentucky
Commission agreed with LG&E 's position on the appropriate loss factor to use in
the FAC computation and reduced the refund level for the 18-month period under
review to approximately $800,000. LG&E implemented the refund with billings in
the month of January 2000. LG&E has filed an appeal from the Kentucky
Commission's February 1999 orders with the Franklin Circuit Court. A decision on
the appeals by the Court is expected in 2000.
LG&E intends to file before the end of the first quarter an application with the
Kentucky Commission for authority to increase its natural gas rates in order to
recoup higher costs for providing natural gas distribution services. LG&E
expects implementation before the end of 2000.
KENTUCKY PSC ADMINISTRATIVE CASE FOR AFFILIATE TRANSACTIONS. In December 1997,
the Kentucky Commission opened Administrative Case No. 369 to consider Kentucky
Commission policy regarding cost allocations, affiliate transactions and codes
of conduct governing the relationship between utilities and their non-utility
operations and affiliates. The Kentucky Commission intends to address two major
areas in the proceedings: the tools and conditions needed to prevent cost
shifting and cross-subsidization between regulated and non-utility operations;
and whether a code of conduct should be established to assure that non-utility
segments of the holding company are not engaged in practices that could result
in unfair competition caused by cost shifting from the non-utility affiliate to
the utility. In September 1998, the Kentucky Commission issued a draft code of
conduct and cost allocation guidelines. In January 1999, LG&E, as well as all
parties to the proceeding, filed comments on the Kentucky Commission draft
proposals. In December 1999, the Kentucky Commission issued guidelines on cost
allocation and held a hearing in January 2000, on the draft code of conduct.
Management does not expect the ultimate resolution of this matter to have a
material adverse effect on LG&E's financial position or results of operations.
23
NOTE 4 - FINANCIAL INSTRUMENTS
The cost and estimated fair values of LG&E's non-trading financial instruments
as of December 31, 1999 and 1998 follow (in thousands of $):
1999 1998
---- ----
Fair Fair
Cost Value Cost Value
---- ----- ---- -----
Marketable securities $ 7,253 $ 6,936 $ 17,767 $ 17,851
Long-term investments -
Not practicable to estimate
fair value 746 746 748 748
Preferred stock subject
to mandatory redemption 25,000 24,861 25,000 26,413
Long-term debt (including
current portion) 626,800 623,498 626,800 648,603
U.S. Treasury note and
bond futures -- 81 -- (50)
Interest-rate swaps -- 1,666 -- (7,378)
All of the above valuations reflect prices quoted by exchanges except for the
swaps and the long-term investments. The fair values of the swaps reflect price
quotes from dealers or amounts calculated using accepted pricing models. The
fair values of the long-term investments reflect cost, since LG&E cannot
reasonably estimate fair value.
INTEREST RATE SWAPS. LG&E enters into interest rate swap agreements to exchange
variable interest rate payments obligations without the exchange of underlying
principal amounts. As of December 31, 1999 and 1998, LG&E was party to various
interest rate swaps with aggregate notional amounts of $234.3 million and $249.3
million, respectively. Under swap agreements LG&E paid fixed rates averaging
3.80% and 3.89% and received variable rates of averaging 5.46% and 4.00% at
December 31, 1999 and 1998, respectively. The swaps mature on dates ranging from
2001 to 2020.
At December 31, 1999, LG&E held U.S. Treasury note and bond futures contracts
with notional amounts totaling $3.5 million. These contracts are used to hedge
price risk associated with certain marketable securities and mature in March
2000.
NOTE 5 - CONCENTRATIONS OF CREDIT AND OTHER RISK
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed to perform as contracted. Concentrations
of credit risk (whether on- or off-balance sheet) relate to groups of customers
or counterparties that have similar economic or industry characteristics that
would cause their ability to meet contractual obligations to be similarly
affected by changes in economic or other conditions.
LG&E's customer receivables and gas and electric revenues arise from deliveries
of natural gas to approximately 295,000 customers and electricity to
approximately 366,000 customers in Louisville and adjacent areas in Kentucky.
For the year ended December 31, 1999, 82% of total revenue was derived from
electric operations and 18% from gas operations.
In December 1998, LG&E and IBEW Local 2100 employees, which represent
approximately 60% of LG&E's workforce, entered into a three-year collective
bargaining agreement.
24
NOTE 6 - MARKETABLE SECURITIES
LG&E's marketable securities have been determined to be "available-for-sale"
under the provisions of SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES. Proceeds from sales of available-for-sale securities in
1999 were approximately $11.7 million, which resulted in an immaterial net
realized gain, calculated using the specific identification method. Proceeds
from sales of available-for-sale securities in 1998 were approximately $18.8
million, which resulted in immaterial realized gains and losses.
Approximate cost, fair value, and other required information pertaining to
LG&E's available-for-sale securities by major security type, as of December 31,
1999 and 1998, follow (in thousands of $):
Fixed
Equity Income Total
------ ------ -----
1999:
-----
Cost $ 4,385 $ 2,868 $ 7,253
Unrealized gains 90 3 93
Unrealized losses (304) (106) (410)
------- -------- --------
Fair values $ 4,171 $ 2,765 $ 6,936
======= ======== ========
Fair values:
No maturity $ 4,171 $ -- $ 4,171
Contractual maturities:
Less than one year -- 2,134 2,134
One to five years -- 631 631
------- -------- --------
Total fair values $ 4,171 $ 2,765 $ 6,936
======= ======== ========
1998:
-----
Cost $ 3,798 $ 13,969 $ 17,767
Unrealized gains 276 31 307
Unrealized losses (95) (128) (223)
------- -------- --------
Fair values $ 3,979 $ 13,872 $ 17,851
======= ======== ========
Fair values:
No maturity $ 3,979 $ 178 $ 4,157
Contractual maturities:
Less than one year -- 8,301 8,301
One to five years -- 3,861 3,861
Over ten years -- 1,532 1,532
------- -------- --------
Total fair values $ 3,979 $ 13,872 $ 17,851
======= ======== ========
25
NOTE 7 - PENSION PLANS AND RETIREMENT BENEFITS
PENSION PLANS. LG&E sponsors several qualified and non-qualified pension plans
and other postretirement benefit plans for its employees. The following tables
provide a reconciliation of the changes in the plans' benefit obligations and
fair value of assets over the three-year period ending December 31, 1999, and a
statement of the funded status as of December 31 for each of the last three
years (in thousands of $):
1999 1998 1997
---- ---- ----
Pension Plans:
--------------
Change in benefit obligation
Benefit obligation at beginning of year $ 311,935 $274,095 $229,349
Service cost 5,005 6,333 5,214
Interest cost 21,014 19,873 17,629
Plan amendments (2,397) 3,724 3,085
Curtailment (gain) or loss -- (2,218) --
Special termination benefits -- 18,295 --
Benefits paid (15,471) (10,866) (8,735)
Actuarial (gain) or loss (36,819) 2,699 27,553
--------- -------- --------
Benefit obligation at end of year $ 283,267 $311,935 $274,095
========= ======== ========
Change in plan assets
Fair value of plan assets at beginning of year $ 308,660 $280,238 $238,026
Actual return on plan assets 51,995 38,913 46,078
Employer contributions 14,911 375 4,869
Benefits paid (15,471) (10,866) (8,735)
--------- -------- --------
Fair value of plan assets at end of year $ 360,095 $308,660 $280,238
========= ======== ========
Reconciliation of funded status
Funded status $ 76,828 $ (3,275) $ 6,143
Unrecognized actuarial (gain) or loss (126,554) (72,037) (61,720)
Unrecognized transition (asset) or obligation (6,965) (8,076) (9,188)
Unrecognized prior service cost 35,588 41,447 43,518
-------- -------- --------
Net amount recognized at end of year $ (21,103) $(41,941) $(21,247)
========= ======== ========
Other Benefits:
---------------
Change in benefit obligation
Benefit obligation at beginning of year $ 44,964 $ 43,373 $ 39,951
Service cost 1,205 761 746
Interest cost 3,270 2,946 2,942
Plan amendments 2,377 599 --
Curtailment (gain) or loss -- 344 --
Special termination benefits -- 2,855 --
Benefits paid (3,050) (2,634) (2,604)
Actuarial (gain) or loss (3,769) (3,280) 2,338
--------- -------- --------
Benefit obligation at end of year $ 44,997 $ 44,964 $ 43,373
========= ======== ========
Change in plan assets
Fair value of plan assets at beginning of year $ 6,062 $ 4,384 $ 2,284
Actual return on plan assets 1,776 199 80
Employer contributions 4,681 3,207 3,696
Benefits paid (1,993) (1,728) (1,676)
--------- -------- --------
Fair value of plan assets at end of year $ 10,526 $ 6,062 $ 4,384
========= ======== ========
26
1999 1998 1997
---- ---- ----
Reconciliation of funded status
Funded status $(34,471) $(38,902) $(38,989)
Unrecognized actuarial (gain) or loss (1,638) (285) 2,901
Unrecognized transition (asset) or obligation 14,489 18,080 20,053
Unrecognized prior service cost 4,292 3,519 3,410
-------- -------- --------
Net amount recognized at end of year $(17,328) $(17,588) $(12,625)
======== ======== ========
There are no plan assets in the nonqualified plan due to the nature of the plan.
The following tables provide the amounts recognized in the balance sheet and
information for plans with benefit obligations in excess of plan assets as of
December 31, 1999, 1998 and 1997 (in thousands of $):
1999 1998 1997
---- ---- ----
Pension Plans:
--------------
Amounts recognized in the balance sheet consisted of:
Prepaid benefits cost $ 6,466 $ -- $ --
Accrued benefit liability (27,569) (41,977) (21,317)
Intangible asset -- 36 70
-------- -------- --------
Net amount recognized at year-end $(21,103) $(41,941) $(21,247)
======== ======== ========
Additional year-end information for plans with benefit
obligations in excess of plan assets:
Projected benefit obligation (1) $139,491 $148,005 $121,902
Accumulated benefit obligation (2) 4,327 131,430 4,179
Fair value of plan assets (1) 133,336 107,988 99,151
(1)All years include non-union plan and unfunded SERPs.
(2)1998 includes non-union plan and SERPs. 1999
and 1997 include SERPs only.
Other Benefits:
---------------
Amounts recognized in the balance sheet consisted of:
Accrued benefit liability $(17,328) $(17,588) $(12,625)
======== ======== ========
Additional year-end information for plans
with benefit obligations in
excess of plan assets:
Projected benefit obligation $ 44,997 $ 44,964 $ 43,373
Fair value of plan assets 13,074 6,062 4,384
27
The following table provides the components of net periodic benefit cost for the
plans for 1999, 1998 and 1997 (in thousands of $):
1999 1998 1997
---- ---- ----
Pension Plans:
--------------
Components of net periodic benefit cost
Service cost $ 5,005 $ 6,333 $ 5,214
Interest cost 21,014 19,873 17,629
Expected return on plan assets (28,946) (23,701) (19,849)
Amortization of prior service cost 3,462 3,882 3,708
Amortization of transition (asset) or obligation (1,112) (1,112) (1,112)
Recognized actuarial (gain) or loss (2,621) (2,248) (2,866)
-------- -------- --------
Net periodic benefit cost $ (3,198) $ 3,027 $ 2,724
======== ======== ========
Special charges
Curtailment gain $ -- $ (2,168) $ --
Prior service cost recognized -- 1,914 --
Special termination benefits -- 18,295 --
-------- -------- --------
Total charges $ -- $ 18,041 --
======== ======== ========
Other Benefits:
---------------
Components of net periodic benefit cost
Service cost $ 1,205 $ 761 $ 746
Interest cost 3,270 2,946 2,942
Expected return on plan assets (401) (296) (151)
Amortization of prior service cost 473 367 328
Amortization of transition (asset) or obligation 1,114 1,315 1,337
Recognized actuarial gain (183) -- --
-------- -------- --------
Net periodic benefit cost $ 5,478 $ 5,093 $ 5,202
======== ======== ========
Special charges
Curtailment loss $ -- $ 1,005 $ --
Prior service cost recognized -- 124 --
Special termination benefits -- 2,855 --
-------- -------- --------
Total charges $ -- $ 3,984 $ --
======== ======== ========
On May 4, 1998, LG&E Energy and KU Energy merged, with LG&E Energy as the
surviving corporation. During 1998, LG&E invested approximately $18 million in
special termination benefits as a result of its early retirement program offered
to eligible employees post-merger.
The assumptions used in the measurement of LG&E's pension benefit obligation are
shown in the following table:
1999 1998 1997
---- ---- ----
Weighted-average assumptions as of December 31:
Discount rate 8.00% 7.00% 7.00%
Expected long-term rate of return on plan assets 9.50% 8.50% 8.50%
Rate of compensation increase 5.00% 3.50%-4.00% 2.00%-4.00%
For measurement purposes, a 7.00% annual increase in the per capita cost of
covered health care benefits was assumed for 2000. The rate was assumed to
decrease gradually to 4.75% for 2005 and remain at that level thereafter.
28
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects (in thousands of $):
1% Decrease 1% Increase
----------- -----------
Effect on total of service and interest cost components for 1999 $ (150) $ 176
Effect on year-end 1999 postretirement benefit obligations (1,189) 1,358
THRIFT SAVINGS PLANS. LG&E has a thrift savings plan under section 401(k) of the
Internal Revenue Code. Under the plan, eligible employees may defer and
contribute to the plan a portion of current compensation in order to provide
future retirement benefits. LG&E makes contributions to the plan by matching a
portion of the employee contributions. The costs were approximately $2.7
million, $2.4 million, and $1.8 million for 1999, 1998, and 1997, respectively.
NOTE 8 - INCOME TAXES
Components of income tax expense are shown in the table below (in thousands
of $):
1999 1998 1997
---- ---- ----
Included in operating expenses:
Current - federal $53,981 $45,716 $57,590
- state 13,680 11,895 14,593
Deferred - federal - net (4,818) 2,276 (4,565)
- state - net (780) 678 703
Deferred investment tax credit -- 55 102
Amortization of investment tax credit (4,289) (4,313) (4,342)
------- ------- -------
Total 57,774 56,307 64,081
------- ------- -------
Included in other income and (deductions):
Current - federal 217 660 1,484
- federal - merger costs -- (6,758) --
- state (30) 6 161
- state - merger costs -- (1,737) --
Deferred - federal - net 254 (165) 292
- state - net 65 (42) 75
------- ------- -------
Total 506 (8,036) 2,012
------- ------- -------
Total income tax expense $58,280 $48,271 $66,093
======= ======= =======
29
Net deferred tax liabilities resulting from book-tax temporary differences are
shown below (in thousands of $):
1999 1998
---- ----
Deferred tax liabilities:
Depreciation and other
plant-related items $321,889 $323,869
Other liabilities 5,324 9,644
-------- --------
327,213 333,513
-------- --------
Deferred tax assets:
Investment tax credit 27,145 28,876
Income taxes due to customers 22,588 25,447
Pension overfunding 2,193 2,099
Accrued liabilities not currently
deductible and other 19,377 22,502
-------- --------
71,303 78,924
-------- --------
Net deferred income tax liability $255,910 $254,589
======== ========
A reconciliation of differences between the statutory U.S. federal income tax
rate and LG&E's effective income tax rate follows:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 5.1 5.5 5.7
Amortization of investment tax credit (2.8) (3.4) (2.4)
Nondeductible merger expenses -- 2.4 --
Other differences - net (1.9) (1.3) (1.5)
---- ---- ----
Effective income tax rate 35.4% 38.2% 36.8%
==== ==== ====
NOTE 9 - OTHER INCOME AND DEDUCTIONS
Other income and deductions consisted of the following at December 31 (in
thousands of $):
1999 1998 1997
---- ---- ----
Interest and dividend income $ 4,086 $ 4,245 $ 4,786
Interest on income tax settlement -- -- 1,446
Gain on sale of stock options -- -- 1,794
Gains (losses) on fixed asset disposal 2,394 530 77
Donations (102) (168) (147)
Income taxes and other (2,237) (2,111) (3,679)
Income tax benefit on merger costs -- 8,495 --
------- ------- -------
Total other income and deductions $ 4,141 $10,991 $ 4,277
======= ======= =======
30
NOTE 10 - FIRST MORTGAGE BONDS AND POLLUTION CONTROL BONDS
Long-term debt and the current portion of long-term debt, summarized below (in
thousands of $), consists primarily of first mortgage bonds and pollution
control bonds. Interest rates and maturities in the table below are for the
amounts outstanding at December 31, 1999.
Weighted
Average
Stated Interest Principal
Interest Rates Rate Maturities Amounts
-------------- -------- ----------- ---------
Noncurrent portion 5.45% - 7.63% 6.44% 2002 - 2023 $380,600
Current portion (pollution
control bonds) Variable 3.67% 2013 - 2027 246,200
Under the provisions for LG&E's variable-rate pollution control bonds, the bonds
are subject to tender for purchase at the option of the holder and to mandatory
tender for purchase upon the occurrence of certain events, causing the bonds to
be classified as current portion of long-term debt. The average annualized
interest rate for these bonds were 3.98%.
Maturities of LG&E's first mortgage bonds and pollution control bonds (principal
amounts stated in thousands of $) at December 31, 1999, are summarized below.
2001 $ --
2002 20,000
2003 42,600
2004 --
2005 --
Thereafter 318,000
--------
Total $380,600
========
In December 1999, LG&E notified bondholders of its intent to exercise its call
option on its $20.0 million 7.50% First Mortgage Bonds due July 1, 2002. The
bonds were redeemed in January 2000 utilizing proceeds from issuance of
commercial paper.
In June 1998, $20 million of LG&E's First Mortgage Bonds matured and were
retired.
Annual requirements for the sinking funds of LG&E's First Mortgage Bonds (other
than the First Mortgage Bonds issued in connection with certain Pollution
Control Bonds) are the amounts necessary to redeem 1% of the highest principal
amount of each series of bonds at any time outstanding. Property additions (166
2/3% of principal amounts of bonds otherwise required to be so redeemed) have
been applied in lieu of cash.
Substantially all of LG&E's utility plants are pledged as security for its first
mortgage bonds. LG&E's indenture, as supplemented, provides in substance that,
under certain specified conditions, portions of retained earnings will not be
available for the payment of dividends on common stock. No portion of retained
earnings is presently restricted by this provision.
NOTE 11 - NOTES PAYABLE
LG&E's short-term financing requirements are satisfied through the sale of
commercial paper. LG&E had outstanding commercial paper of $120.1 million at
December 31, 1999, at a weighted-average interest rate of
31
6.02%. LG&E had no short-term borrowings at December 31, 1998.
At December 31, 1999, LG&E had unused lines of credit of $200 million, for which
it pays commitment fees. The credit facility provides support of commercial
paper borrowings. The credit lines are scheduled to expire in 2001. Management
expects to renegotiate these lines when they expire.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
CONSTRUCTION PROGRAM. LG&E had commitments in connection with its construction
program aggregating approximately $14.5 million at December 31, 1999.
Construction expenditures for the years 2000 and 2001 are estimated to total
approximately $401 million.
OPERATING LEASE. LG&E leases office space and accounts for all of its office
space leases as operating leases. Total lease expense for 1999, 1998, and 1997,
less amounts contributed by the parent company, was $1.5 million, $1.6 million,
and $1.8 million, respectively. The future minimum annual lease payments under
lease agreements for years subsequent to December 31, 1999, are as follows (in
thousands of $):
2000 $ 3,321
2001 3,654
2002 3,594
2003 3,507
2004 3,507
Thereafter 1,754
---------
Total $ 19,337
=========
In December 1999, LG&E and KU entered into an 18-year cross-border lease of its
two jointly owned combustion turbines recently installed at KU's Brown facility.
LG&E's obligation was defeased upon consummation of the cross-border lease. The
transaction produced a pre-tax gain of approximately $1.2 million which has been
deferred pending resolution of rate treatment by the Kentucky Commission.
ENVIRONMENTAL. The Act imposed stringent new SO2 and NOx emission limits on
electric generating units. LG&E previously had installed scrubbers on all of its
generating units. LG&E's strategy for Phase II, commencing January 1, 2000, is
to use accumulated emissions allowances to delay additional capital expenditures
and may also include fuel switching or the installation of additional scrubbers.
LG&E met the NOx emission requirements of the Act through installation of
low-NOx burner systems. LG&E's compliance plans are subject to many factors
including developments in the emission allowance and fuel markets, future
regulatory and legislative initiatives, and advances in clean air control
technology. LG&E will continue to monitor these developments to ensure that its
environmental obligations are met in the most efficient and cost-effective
manner.
In September 1998, the EPA announced its final "NOx SIP call" rule requiring
significant additional reductions in NOx emissions by May 2003, in order to
mitigate alleged ozone transport to the Northeast. While each of the 22 states
covered by the rule is free to allocate its assigned NOx reductions among
various emissions sectors as it deems appropriate, the regulation may ultimately
require electric generating units to reduce their NOx emissions to 0.15
lb./Mmbtu - an 85% reduction from 1990 levels. In related proceedings in
response to petitions filed by various Northeast states, in December 1999, EPA
issued a final rule directing similar NOx reductions from a number of
specifically named electric generating units including all LG&E stations.
Several states, various labor and industry groups, and individual companies have
appealed both EPA rulings to the U.S. Court of Appeals for the Washington D.C.
Circuit. Management is currently unable to determine the outcome or exact impact
of this matter until such time as the courts rule on the pending legal
challenges and the states
32
implement the final regulatory mandate. However, if the 0.15 lb. target is
ultimately imposed, LG&E will be required to incur significant capital
expenditures and increased operation and maintenance costs for additional
controls.
Subject to further study, analysis, and the outcome of pending litigation
against the EPA, LG&E estimates that it may incur capital costs for NOx
compliance ranging from $65 million to reduce emissions to the level of 0.25
lb./Mmbtu (Commonwealth of Kentucky's proposed NOx compliance level) to $165
million to reduce emissions to the level of 0.15 lb./Mmbtu (current EPA
regulations). These costs would generally be incurred beginning in 2000. LG&E
believes its costs in this regard to be comparable to those of similarly
situated utilities with like generation assets. LG&E anticipates that such
capital and operating costs are the type of costs that are eligible for recovery
from customers under their environmental surcharge mechanisms and believe that a
significant portion of such costs could be recovered. However, Kentucky
Commission approval is necessary and there can be no guarantee of recovery.
LG&E is also addressing other air quality issues. First, LG&E is monitoring the
status of EPA's revised NAAQS for ozone and particulate matter. In May 1999, the
Washington D.C. Circuit remanded the final rule and directed EPA to undertake
additional rulemaking efforts. LG&E continues to monitor EPA actions to
challenge that ruling. Second, LG&E was notified by regulatory agencies that the
Cane Run Station may be the source of a potential exceedance of the NAAQS that
could require LG&E to incur additional capital expenditures or accept certain
emissions limitations. After reviewing additional modeling information submitted
by LG&E, in January 2000, EPA concluded that the Cane Run Station does not
contribute to any potential NAAQS exceedance and that no further action is
required from LG&E. Third, LG&E is working with regulatory authorities to review
the effectiveness of remedial measures aimed at controlling particulate
emissions from its Mill Creek Station. LG&E previously settled a number of
property damage claims from adjacent residents and completed significant plant
modifications as part of its ongoing capital construction program.
LG&E owns or formerly owned three properties which contained past MGP
operations. Various contaminants are typically found at such former MGP sites
and environmental remediation measures are frequently required. LG&E has reached
agreements for other parties to assume cleanup responsibility for two sites it
formerly owned. In addition, LG&E recently reached an agreement with the
Kentucky Division of Waste Management with respect to a third LG&E-owned site in
which LG&E committed to impose certain property restrictions and conduct
additional monitoring in lieu of a cleanup. Based on currently available
information, management estimates that it will incur additional MGP costs of
less than $500,000. Accordingly, an accrual of $500,000 has been recorded in the
accompanying financial statements.
NOTE 13 - JOINTLY OWNED ELECTRIC UTILITY PLANT
LG&E owns a 75% undivided interest in Trimble County Unit 1. Accounting for the
75% portion of the Unit, which the Kentucky Commission has allowed to be
reflected in customer rates, is similar to LG&E's accounting for other wholly
owned utility plants.
Of the remaining 25% of the Unit, IMEA owns a 12.12% undivided interest, and
IMPA owns a 12.88% undivided interest. Each is responsible for its proportionate
ownership share of fuel cost, operation and maintenance expenses, and
incremental assets.
33
The following data represent shares of the jointly owned property:
Trimble County
LG&E IMPA IMEA Total
------ ------ ------ ------
Ownership interest 75% 12.88% 12.12% 100%
Mw capacity 371.25 63.75 60.00 495.00
(in thousands of $):
Cost $546,497
Accumulated depreciation 140,972
--------
Net book value $405,525
========
Construction work in progress
(included above) $ 673
In July 1999, following approval from the Kentucky Commission, LG&E purchased
for $45.7 million a 38% interest in two 164.5 Mw natural gas turbines installed
at KU's E.W. Brown facility (Units 6 and 7) from Capital Corp.
NOTE 14 - SEGMENTS OF BUSINESS AND RELATED INFORMATION
Effective December 31, 1998, LG&E adopted SFAS No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. LG&E is a regulated public
utility engaged in the generation, transmission, distribution, and sale of
electricity and the storage, distribution, and sale of natural gas. Financial
data for business segments, follow (in thousands of $):
Electric Gas Total
-------- --- -----
1999
Operating revenues $ 790,670(a) $177,579 $ 968,249
Depreciation and amortization 83,619 13,602 97,221
Interest income 3,435 651 4,086
Interest expense 31,558 6,404 37,962
Operating income taxes 56,883 891 57,774
Net income 104,853 1,417 106,270
Total assets 1,775,498 395,954 2,171,452
Construction expenditures 160,844 33,800 194,644
1998
Operating revenues $ 658,511(b) $191,545 $ 850,056
Depreciation and amortization 79,866 13,312 93,178
Interest income 3,566 679 4,245
Interest expense 30,389 5,933 36,322
Merger costs 32,072 -- 32,072
Operating income taxes 56,401 (94) 56,307
Net income 75,368 2,752 78,120
Total assets 1,727,463 377,174 2,104,637
Construction expenditures 105,836 32,509 138,345
34
Electric Gas Total
-------- --- -----
1997
Operating revenues $ 614,532 $231,011 $ 845,543
Depreciation and amortization 79,958 13,062 93,020
Interest income 5,279 953 6,232
Interest expense 33,349 5,841 39,190
Operating income taxes 59,415 4,666 64,081
Net income 108,236 5,037 113,273
Total assets 1,677,278 378,363 2,055,641
Construction expenditures 81,713 29,180 110,893
(a) Net of provision for rate refund of $1.7 million.
(b) Net of provision for rate refund of $4.5 million.
NOTE 15 - SELECTED QUARTERLY DATA (UNAUDITED)
Selected financial data for the four quarters of 1999 and 1998 are shown below.
Because of seasonal fluctuations in temperature and other factors, results for
quarters may fluctuate throughout the year.
Quarters Ended
March June September December
----- ---- --------- --------
(Thousands of $)
1999
----
Operating revenues $226,620 $214,097 $296,395 $231,137
Net operating income 27,016 30,596 51,036 31,443
Net income 18,916 22,040 41,704 23,610
Net income available
for common stock 17,826 20,954 (a) 40,614 22,375 (b)
1998
----
Operating revenues $233,344 $201,389 $229,885 $185,438
Net operating income 32,326 33,629 53,420 16,148
Net income 23,399 21 44,861 9,839
Net income (loss) available
for common stock 22,276 (1,122) 43,726 8,672
(a) The increase of $22.1 million compared to June 1998 was due to a
non-recurring after-tax charge of $23.6 million from
merger-related expenses.
(b) The increase of $13.7 million compared to December 1998 was
primarily due to a non-recurring charge to refund certain amounts
collected under the ECR and increased sales due to colder weather
in 1999.
NOTE 16 - SUBSEQUENT EVENTS
On February 28, 2000, LG&E Energy announced that its Board of Directors accepted
an offer to be acquired by PowerGen for cash of approximately $3.2 billion or
$24.85 per share and the assumption of $2.2 billion of LG&E Energy's debt.
Pursuant to the acquisition agreement, among other things, LG&E Energy will
become a wholly owned subsidiary of PowerGen and its U.S. headquarters. The
Utility Operations of the Company will continue their separate identities and
serve customers in Kentucky and Virginia under their present names. The
preferred stock and debt securities of the Utility Operations will not be
affected by this transaction resulting in the Utility Operations' obligation to
continue to file SEC reports. The acquisition is expected to close 9 to 12
35
months from the announcement, shortly after all of the conditions to
consummation of the acquisition are met. Those conditions include, without
limitation, the approval of the holders of a majority of the outstanding shares
of common stock of each of LG&E Energy and PowerGen, the receipt of all
necessary governmental approvals and the making of all necessary governmental
filings, including approvals of various regulators in Kentucky and Virginia
under state utility laws, the approval of the FERC under the Federal Power Act,
the approval of the SEC under the Public Utility Holding Company Act of 1935,
and the filing of requisite notifications with the Federal Trade Commission and
the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the expiration of all applicable waiting periods
thereunder. Shareholder meetings to vote upon the approval of the acquisition
are expected to be held during the second quarter of 2000 for both LG&E Energy
and PowerGen. During the first quarter of 2000, the Company expensed
approximately $1.0 million relating to the PowerGen transaction. The foregoing
description of the acquisition does not purport to be complete and is qualified
in its entirety by reference to LG&E Energy's current reports on Form 8-K, filed
February 29, 2000, with the SEC.
On March 3, 2000, the U.S. Court of Appeals for the Washington D.C. Circuit
issued a final opinion upholding the NOx SIP call rule requiring electric
generating units to reduce their NOx emissions to 0.15 lb./Mmbtu by May 2003.
Some of the litigants will likely seek further judicial review of the ruling.
In the first quarter of 2000, LG&E will take a restructuring charge relating to
the reduction of positions and the integration of LG&E's and KU's operations,
including combining retail gas and electric operations, consolidation of
customer service centers and the redesigning various other processes.
The Kentucky Commission responded to the motions filed by LG&E for computational
and other errors made in Orders received on base rate reductions in February
2000 by granting rehearings for LG&E on various issues.
36
Louisville Gas and Electric Company
REPORT OF MANAGEMENT
The management of Louisville Gas and Electric Company is responsible for the
preparation and integrity of the financial statements and related information
included in this Annual Report. These statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis and, necessarily, include amounts that reflect the best estimates and
judgment of management.
LG&E's financial statements have been audited by Arthur Andersen LLP,
independent public accountants. Management has made available to Arthur Andersen
LLP all LG&E's financial records and related data as well as the minutes of
shareholders' and directors' meetings. Management has established and maintains
a system of internal controls that provides reasonable assurance that
transactions are completed in accordance with management's authorization, that
assets are safeguarded and that financial statements are prepared in conformity
with generally accepted accounting principles. Management believes that an
adequate system of internal controls is maintained through the selection and
training of personnel, appropriate division of responsibility, establishment and
communication of policies and procedures and by regular reviews of internal
accounting controls by LG&E's internal auditors. Management reviews and modifies
its system of internal controls in light of changes in conditions and
operations, as well as in response to recommendations from the internal
auditors. These recommendations for the year ended December 31, 1999, did not
identify any material weaknesses in the design and operation of LG&E's internal
control structure.
The Audit Committee of the Board of Directors is composed entirely of outside
directors. In carrying out its oversight role for the financial reporting and
internal controls of LG&E, the Audit Committee meets regularly with LG&E's
independent public accountants, internal auditors and management. The Audit
Committee reviews the results of the independent accountants' audit of the
financial statements and their audit procedures, and discusses the adequacy of
internal accounting controls. The Audit Committee also approves the annual
internal auditing program and reviews the activities and results of the internal
auditing function. Both the independent public accountants and the internal
auditors have access to the Audit Committee at any time.
Louisville Gas and Electric Company maintains and internally communicates a
written code of business conduct that addresses, among other items, potential
conflicts of interest, compliance with laws, including those relating to
financial disclosure and the confidentiality of proprietary information.
37
Louisville Gas and Electric Company
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Louisville Gas and Electric Company:
We have audited the accompanying balance sheets and statements of capitalization
of Louisville Gas and Electric Company (a Kentucky corporation and a
wholly-owned subsidiary of LG&E Energy Corp.) as of December 31, 1999 and 1998,
and the related statements of income, retained earnings, cash flows and
comprehensive income for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of LG&E's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Louisville Gas and Electric
Company as of December 31, 1999F and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
Louisville, Kentucky Arthur Andersen LLP
January 26, 2000 (Except with respect
to the matters discussed in Note 16, as
to which the date is March 3, 2000.)
38
LOUISVILLE GAS AND ELECTRIC COMPANY
PROXY SERVICES
P.O. BOX 9079
FARMINGDALE, NY 11735
ADMISSION TICKET
LOUISVILLE GAS AND ELECTRIC COMPANY
Annual Meeting of Shareholders
June 7, 2000
10:00 a.m., EDT
Kentucky International Convention Center
(formerly Commonwealth Convention Center)
Fourth and Market Streets
Louisville, Kentucky
If you plan to attend the meeting, please check the
box on the proxy card indicating that you plan to attend.
Please bring this Admission Ticket to the meeting with you.
THE BOTTOM PORTION OF THIS FORM IS THE PROXY CARD. Each
proposal is fully explained in the enclosed Notice of
Annual Meeting of Shareholders and Proxy Statement. To vote
your proxy, please MARK by placing an "X" in the
appropriate box, SIGN and DATE the proxy. Then please
DETACH and RETURN the completed proxy promptly in the
enclosed envelope.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: LGETIC
KEEP THIS PORTION FOR YOUR RECORDS
- -------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED
LOUISVILLE GAS AND ELECTRIC COMPANY
I plan to attend the Annual Meeting
and I will bring ___ guest(s). / /
VOTE ON DIRECTORS
- -------------------------------------------------------------------------
1. Proposal to elect Directors. FOR WITHHOLD FOR ALL
The nominees for Directors are: ALL ALL EXCEPT
01) William C. Ballard, Jr. / / / / / /
02) T. Ballard Morton, Jr.
03) William L. Rouse, Jr.
04) Charles L. Shearer
To withhold authority to vote, mark "For All Except" and write
the nominee's number on the line below.
- -------------------------------------------------------------------------
FOR AGAINST ABSTAIN
2. Approval of ARTHUR ANDERSEN LLP
as independent auditors for 2000. / / / / / /
SIGNATURE(S) SHOULD CORRESPOND TO THE NAME(S) APPEARING IN
THIS PROXY. IF EXECUTOR, TRUSTEE, GUARDIAN, ETC. PLEASE INDICATE.
- ----------------------------------------------
Signature (PLEASE SIGN WITHIN BOX) Date
- ----------------------------------------------
Signature (Joint Owners) Date
[MAP]
LOUISVILLE GAS AND ELECTRIC COMPANY
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS--JUNE 7, 2000
Roger W. Hale, Victor A. Staffieri and John R. McCall are hereby
appointed as proxies, with full power of substitution, to vote the shares of
the shareholder(s) named on the reverse side hereof, at the Annual Meeting of
Shareholders of Louisville Gas and Electric Company to be held on June 7,
2000, and at any adjournment thereof, as directed on the reverse side hereof,
and in their discretion to act upon any other matters that may come before
the meeting or any adjournment thereof.
THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND WILL BE
VOTED AS YOU SPECIFY. IF NOT SPECIFIED, THIS PROXY WILL BE VOTED FOR ALL OF
THE PROPOSALS. A VOTE FOR PROPOSAL 1 INCLUDES DISCRETIONARY AUTHORITY TO
CUMULATE VOTES SELECTIVELY AMONG THE NOMINEES AS TO WHOM AUTHORITY TO VOTE
HAS NOT BEEN WITHHELD.
Please mark, sign and date this proxy on the reverse side and return the
completed proxy promptly in the enclosed envelope.